Salespeople lose on definition of ‘commission’

The Missouri Court of Appeals Eastern District has determined that the state law definition of “commission” does not include compensation based on a percentage of profits.

The decision affirmed a summary judgment by St. Louis County Circuit Judge Melvyn Wiesman, which ended a class action lawsuit by former salespeople against National Dealers Warranty Inc. The plaintiffs alleged that the warranty company had withheld an initial $1,000 deduction from each sales person’s commission and failed to pay terminated salespeople their full commission once they left the company. The employees filed their lawsuit to seek recovery of their unpaid commissions and statutory penalties.

Wiesman granted summary judgment for National Dealers Warranty after he found that the salespeople could not prove that they were compensated based on the term “commission” as defined in state law.

The commission the salespeople received was based on a “stated profit.” National Dealers Warranty sells extended car warranties over the phone. In addition to the employees’ base salaries, they received 10 percent of the stated profit on each warranty they sold.

Both parties provided to the court an example of how the commission worked using the Choice warranty. The Choice warranty retails for $2,271, and National Dealers Warranty established a stated profit of $800 when this warranty was sold at retail price. If a salesman sold the warranty at retail price, his commission would be 10 percent of $800 – $80. If the salesman were to sell the warranty for more than the retail price he would receive 10 percent of that increase. So if he sold one for $22 more than retail price, he would receive $2.20 plus the 10 percent of the stated profit, for a total of $82.20. 

The question of whether a certain payment structure constitutes a “commission” under Section 407.913 was an issue of first impression before the court.

The statute defines commission 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.” 

The salespeople argued that their commissions qualified under both sections of the definition.

They first claimed that since their employer had a detailed method for calculating their commission, and since salespeople knew how much to expect from any given warranty sale, that the commission constituted as a specific amount per sale.

But the court disagreed. The statute applies to “compensation that is expressed as a specific dollar amount per sale, a fixed principal sum, such as a $100 commission per warranty sold,” Judge Roy Richter wrote for the unanimous court. 

In this case, the salespeople’s commissions varied according to the price of the warranties.

In its second argument, the salespeople claimed that the first part of the statute applies to them because their compensation is based on a stated profit or “adjusted sales price,” and they are being paid based on a percentage of sales.

Attorney Joe Jacobson, of Green Jacobson, said his client received a commission based on two percentages. The company applied 0 percent to first $1,471 for a Choice warranty, and salesmen receive 10 percent for every dollar above that amount.

“Even though [National Dealers Warranty] call it as a profit payment by commission and they claim a stated profit, it doesn’t mean the commissions are based on profit,” he said.

National Dealers Warranty disagreed and argued that the commission was based on a percentage of profits rather than sales and the Missouri Legislature could have defined commission to include compensation based on a percentage of profits and didn’t.

The Court of Appeals sided with the company.

“We must assume that, had the Missouri legislature intended to include compensation that is based on a percentage of profits in the definition of ‘commission,’ it would have so stated,” Richter wrote. “To the contrary, the plain language of the statute affords no evidence of legislative intent to expand the definition in this manner.”

“Whether the term ‘commission’ should be extended to include payments based on a percentage of profits is a question for the legislature rather than the judiciary.”

The Court of Appeals affirmed the circuit court’s judgment.

But Jacobson said the decision will limit the protection the General Assembly gave to salespeople under the statute.
“Businesses can completely avoid the statute by saying the commission is based on the sales price minus one dollar. The commission is no longer based solely on sales. The statute’s protections to salespeople’s right to their commission is completely voided, which was not its intended goal.”

Jacobson said they are considering whether to appeal the opinion.

National Dealers Warranty attorney Thomas Weaver, of Armstrong Teasdale, declined to comment.

The case is Schwab et al. v. National Dealers Warranty Inc., ED92373.