Statute of Frauds and At-Will Employment Doctrine Bar Claim for Unpaid Commissions

On March 7, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Niyazov v. Park Fragrance, LLC, 2014 NY Slip Op. 30610(U), holding that a combination of the statute of frauds and the at-will employee doctrine resulted in an employee having no claim based on a unilateral change to his right to earn commissions.

In Niyazov, the plaintiff sued his former employer and its owners for unpaid pay and commissions. In deciding the defendants' motion to dismiss, the trial court examined the plaintiff's rights in light of both the at-will employee doctrine and the statute of frauds. Because the decision is fact-dependant, we have repeated below both an excerpt of the relevant facts and the court's reasoning.

In May 2006, the plaintiff began working for the defendants. Until February 2009, the plaintiff received a salary and commissions for the sale of cell phone products. In February 2009, the plaintiff was offered the opportunity to work on a new business selling perfume in addition to selling cell phone products. It was orally agreed that the plaintiff would receive an on the buy commission of $0.30 per unit. In June 2009, the plaintiff introduced the defendants to non-party-Bogart Group (Bogart), a French perfume company. In August 2009, Bogart and the defendants entered into an exclusivity contract. Under the parties' alleged $0.30 per unit commission agreement, the plaintiff would have been entitled to $90,000. However, instead of paying the plaintiff this amount, in November 2009, the defendants told the defendant that he would be paid a $10,000 annual bonus in lieu of an on the buy commission plus a $0.05 per unit on the sell commission. The defendant objected, but was told he would be fired if he did not accept this new agreement. The defendant, who was an at-will employee, stayed with the company.

In August 2011, the defendants once again changed the plaintiff's compensation, this time to a $2,000 per month payment, but with no on the sell commissions. The plaintiff was told that he would be paid perpetually so long as the vendors he obtained for the company continued to do business with the defendants, even after the plaintiff left the company. The plaintiff was fired in May 2012. He continued receiving his $2,000 monthly payments until September 2012.

In response to the defendants' motion for partial summary judgment, the court held:

[D]efendants challenge [the plaintiff's] alleged entitlement to the originally agreed-to $0.30 rate. [The plaintiff] seeks to be paid the difference between the lower commissions he received under the two amended oral agreements and the amount he would be entitled to if the $0.30 rate were applied. The $0.30 rate was agreed-to and actually paid until [the plaintiff] procured the Bogart exclusivity contract, which turned out to be immensely lucrative for [the defendants]. Defendants then unilaterally decided to pay [the plaintiff] less. [The plaintiff] now maintains that he is entitled to hold defendants to their original $0.30 rate for the period he was employed. Defendants' argument in opposition is that the at-will doctrine permits them to change [the plaintiff's] oral commission rate. . . . .

It is well settled that when there is an at-will employment relationship, the employer may unilaterally alter the terms of employment, and the employee may end the employment if the new terms are unacceptable. By remaining in the defendant's employ under the new compensation terms, the plaintiff is deemed to have accepted them. Where, as here, an employer made a take it or leave it offer, such that the employee's rejection of the lower commission rate would have led to his termination, the employee's acceptance of the new scale of compensation amounted to an assent on his part.

Nonetheless, an employer cannot retroactively change the terms of the employment agreement he entered into with that employee. Rather, the employer is entitled to change the terms of the employment agreement only prospectively, subject to the employee's right to leave the employment if the new terms are unacceptable. This rule, [the plaintiff] contends, mandates that his $0.30 rate for all future Bogart purchases was locked in - or vested - in August 2009, when the exclusivity contract was signed, but before his compensation structure was changed. [The plaintiff] is wrong.

[The plaintiff] is correct that any commissions earned before the $0.30 rate was changed cannot be reduced by defendants. However, [the plaintiff's] understanding of which commissions were earned before the rate change is erroneous. To explain, when [the plaintiff] procures a vendor for defendants, he gets a cut of all purchases from that vendor. But, [the plaintiff] does not get paid until such purchases are made and, critically, once [the plaintiff] is terminated, he forfeits all future rights to commissions from that vendor since, as his agreement was oral, the statute of frauds precludes his entitlement to perpetual commissions. Thus, if defendants believed they would be doing substantial future business with Bogart which would entitle [the plaintiff] to more money than they wished to pay him, they could fire him and owe him no more money. This is undisputed.

Alternatively, defendants could give [the plaintiff] the option of staying, but at a lower rate. This is what occurred. [The plaintiff's] contention that his prospective commission rate cannot be lowered while employed is incompatible with defendants' absolute right to terminate him and cut off all future commissions.

To be sure, [the plaintiff] could have protected himself when defendants refused to sign a written contract by offering the Bogart business to a competitor. [The plaintiff] was not bound by a non-compete. The lack of a written contract had benefits for both sides since, just as defendants can fire [the plaintiff] or change his commission rate at any time, [the plaintiff] could have quit or sought a competing offer to either make more from another employer or used such offer as leverage to increase the compensation received from defendants. [The plaintiff], however, failed to avail himself of these options and, therefore, cannot appeal to principles of equjty to evade the legal rules governing his situation.

(Internal quotations and citations omitted) (emphasis added).

This decision shows the interplay of several doctrines of contract and employment law and highlights, in our view, the importance of getting agreements in writing.