MISSOURI’S GUIDANCE ON COMMISSIONS AND STATUTORY PENALTIES

In a case of first impression, the Missouri Court of Appeals for the Eastern District recently determined whether an employer’s structure for compensating its sales representatives constitutes a “commission,” as defined by Mo.Rev.Stat. § 407.911.

The plaintiffs in Schwab v. National Dealers Warranty, Inc., — S.W.3d —-, 2009 WL 2870208 (Mo. App. E.D. Sept. 8, 2009), were three former sales representatives of National Dealers Warranty who sold extended automobile warranties over the telephone.  In addition to a base salary, the sales representatives received 10% of the “stated profit” on each warranty they sold.  National Dealers Warranty calculated the “stated profit” based on the difference between a warranty’s retail price (established by National Dealers Warranty after considering estimated cost and overhead) and the final price negotiated between a  sales representative and a customer.  National Dealers Warranty admitted that the “stated profit” was a somewhat arbitrary number.

The former sales representatives brought suit alleging that National Dealers Warranty’s withholding of an initial $1,000 deduction from the sales representatives’ commissions and National Dealers Warranty’s failure to pay the  sales representatives’ full commissions upon the termination of their employment violated Mo.Rev.Stat. § 407.913.

Section 407.913 provides that any employer who fails to timely pay earned commissions is liable to the employee, in addition to actual damages, for liquidated damages equal to the commissions, plus the employee’s attorneys’ fees and costs expended in pursuing the untimely commissions.  “Commission” for purposes of § 407.913 is defined as “compensation accruing to a sales representative for payment by a principal, the rate of which is expressed as a percentage of the dollar amount of orders or sales, or as a specified amount per order or per sale.”  Mo.Rev.Stat. § 407.911(1)

Thus, two compensation schemes qualify as commission: (1) a percentage of the amount of orders or sales; or (2) a specific amount per order or sale.  The former sales representatives argued that their compensation structure at National Dealers Warranty qualified under either option.

First, the former sales representatives argued their compensation structure included a specified amount per sale because they were able to determine the amount of commission to expect for a given warranty sale through National Dealers Warranty’s detailed method for calculating commissions.  National Dealers Warranty countered that the compensation structure included a specified method for calculating commission not a specified amount of commission per sale.  The Court of Appeals agreed and held that to qualify under the second portion of the definition of “commission,” the compensation must be a specific dollar amount per sale (i.e., $100 per warranty sold).

Next, the former  sales representatives contended they were paid a percentage of the amount of their sales because the “stated profit” was merely an adjusted sale price.  National Dealers Warranty argued that the sales representatives’ commissions were based on a percentage of profits, not a percentage of sales, and thus did not fit within the first portion of the definition of “commission.”  The Court of Appeals agreed with National Dealers Warranty.  The Court noted that the Missouri legislature could have defined commission to include a percentage of profits, but did not do so (and cited other states that included a percentage of profits in addition to a percentage of sales in their definitions of commission).  In so holding, the Court specifically noted that, under Missouri law, it is required to strictly construe statutes that impose penalties.

Accordingly, the Court found that the sales representatives’ compensation structure did not constitute “commission” under Mo.Rev.Stat. § 407.911, and affirmed the lower court’s grant of summary judgment in favor of National Dealers Warranty.

Employers should take note that the Schwab ruling appears to indicate that Missouri courts will take a narrow view of the definition of “commission,” and will require that only plans that strictly comply with the plain language of section 407.911 will be subject to the penalties of the statute.

Denise K. Drake, Spencer Fane Britt & Browne LLP – Kansas City, Missouri; Overland Park, Kansas

ddrake@spencerfane.com

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