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Warning: Draft clear compensation agreements to avoid needless litigation

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in Employee Benefits Program,Human Resources

Texas contract law grants great leeway to employers that create incentive payment plans, especially when it comes to how employers calculate what payment is due employees.

Essentially, if the incentive plan says the employer has the right to interpret the agreement language and its decision is final and binding, courts won’t interfere unless the employer interprets it in bad faith. If you are the employee, that’s tough to prove.

As the following case shows, having a clear and unambiguous agreement in the first place can save the time and money it takes to work it all out in court.

Recent case:
Greg Kern worked for the Sitel Corp. as a sales executive. He received an annual salary of $110,000, plus the possibility of incentives based on his sales performance. The incentive compensation plan said Kern could receive up to 250% of his base salary if he exceeded his $8 million revenue goal.

Kern sold several contracts to computer giant Dell, generating more than $16 million. By his calculations, he should have received an additional $275,000 in incentive payments. Sitel paid him just $150,000 based on its interpretation of the agreement, which it said included a cap on incentive payments for sales to a single client such as Dell.

Kern sued, asking a federal court to interpret the agreement. But the court refused to interfere, even though it said the agreement was ambiguous because it gave the employer the final say on interpretation. Unless its interpretation was done in bad faith, the court would not interfere. (Kern v. Sitel, Inc., No. 07-50290, 5th Cir., 2008)

Final note:
Why risk a contracts lawsuit? Have your attorneys draft clear and unambiguous incentive plans. That won’t just keep you out of court. Employees who understand your plan are more likely to work hard to reap the benefits. That’s why you use incentive plans in the first place, right?

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