Attorneys

• Nancy L. Heilman

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• Labor and Employment

Recently, the Pennsylvania Supreme Court addressed whether a departing salesperson, whose “advance” or “draw” exceeded his accumulated commissions, was required to repay the excess to his former employer.  Strongly suggesting that the employment contract did not require such repayment, the Supreme Court remanded the case for the trial court to interpret the contract.  In doing so, the Supreme Court overruled its circa 1925 decision in Snellenburg Clothing Co. v. Levitt.

Michael Polons, representing himself as an experienced salesperson, approached family-owned Banks Engineering (“Banks”), seeking employment as an independent sales representative.  Beginning with Banks’ draft agreement, the terms of the employment contract were negotiated over a period of time with significant input by Polons, who agreed to be compensated by commissions in lieu of salary.  The relevant portion of the agreement provided:

To compensate for low commission payments due to low initial sales, Banks will pay a draw against commission.  This draw will continue until the commissions exceed the draw and this contract is in effect.  Once the commissions exceed the draw the rate of payment will continue at the rate of the draw until the total amount of the draw is compensated for by commissions in excess of the draw or by other means.  When the total draw has been compensated for by commissions earned or other means the full commission will be paid and the draw eliminated.  (Emphasis added.)

Before Banks released the first paycheck for the amount of the draw, Polons was required to sign an addendum to the contract, which provided:

It is understood that this draw is a non-interest loan and is to be paid back by commissions earned or by other means.  In the event of termination of this contract any and all outstanding draw amounts will become due within ninety days.  After ninety days any amounts still due will accrue with interest at the prime rate compounded annually.

During 1½ years of employment, Polons received monthly draws accompanied by statements labeled “Balance Due Corporation” that included a running total of the difference between the draw and the commissions.  After Polons terminated his employment, Banks sought repayment of $38,990 for the amount of the draw in excess of commissions.  Upon Polon’s refusal to reimburse the company, Banks filed a breach of contract action for the balance.

In Snellenburg, the Supreme Court defined “advance” to include an expectation of repayment and created a presumption in favor of repayment of draws against commissions.  Following the Snellenburg case, the trial court ruled in favor of Banks with the exception that the addendum was held unenforceable for lack of consideration.  The Court therefore refused to award interest.  Based on the Snellenburg precedent, the Superior Court affirmed the trial court’s decision.

The Supreme Court reviewed cases from other jurisdictions that had found advances to be in the nature of salary rather than a loan to the employee and viewed repayment as a forfeiture unless the parties had reached a clear understanding that the advances would be repaid.  Persuaded by these cases, the Supreme Court overruled Snellenburg, reversed the Superior Court decision and remanded to the trial court to interpret the contract in light of both parties’ evidence.

The Supreme Court’s ruling places upon the employer the burden of producing sufficient evidence of entitlement to repayment of advances against commissions.  The Supreme Court suggested that the quoted original contract language provided for repayment of advances solely during the life of the contract.  Therefore, if the trial court on remand agreed with that interpretation, the employee had no further obligation to the company once he terminated the contract.  The employer’s argument may have been more convincing to the Court had the language of the addendum providing for repayment following contract termination been included in the original agreement.  However, as the addendum failed for lack of consideration, so did any argument in the employer’s favor.

For more information, please contact nheilman@cohenlaw.com.