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October 15, 2010
Did Employer Owe Salesman Deferred Compensation?
Did Employer Owe Salesman Deferred Compensation?

An Indiana car salesman claimed that he was due deferred compensation at retirement. Did a conversation that took place at his hiring constitute a contract?

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What happened. In 2004, a salesman for Heart City Automotive, a car business, contacted “Roger” suggesting that he come to work there. Roger met with “Debbie,” the president of Heart City and discussed coming to work at the dealership as used car manager. They went to lunch and discussed compensation. According to his deposition, Roger demanded $2,000 a week plus a good bonus, which would have been seven or eight percent of front end net. Roger claimed that this was the going rate for used car managers.

Debbie reportedly told him that she could not afford to pay him that much and suggested $1,000 a week plus the bonus. Roger said that he would work at that rate for 5 years, which would put him at retirement age, and promised to get the place “turned around.” He said that Debbie could pay him the rest when he left work. Debbie reportedly replied “Let’s get this going” and the two shook hands. They never wrote down the terms of this agreement.

Roger testified that “turning the business around” meant making it profitable, and that the used car department could be an important profit center for the business. By “the rest” of the payment, he meant an extra $1,000 for every week that he had worked for one thousand instead of $2,000.

On October 6, 2008, Roger told Debbie that he was retiring and asked for $160,000 in deferred compensation. Debbie replied that she did not owe him that amount. Roger sued for breach of contract. Heart City asked the court to dismiss the case, which it did in January 2010. Roger appealed.

What the court said. The trial court dismissed Roger’s contract claim because it determined that it was barred by the statute of frauds, Indiana Code Section 32-21-1-1(b), which states that a party may not bring a lawsuit for breach of contract unless the contract is in writing and signed by the party being sued. This law applies to any agreement that is not to be completed within one year of forming it. Because Roger and Debbie never wrote down their contract, it was unenforceable under the statute.

Roger argued that he and Debbie had executed an oral employment contract and that it should have been enforceable. First, Roger claimed that the statute does not apply to contracts with an indefinite term, and his contract was for an indefinite period of time. But the Indiana Court of Appeals pointed out that this was simply false. Roger’s own testimony indicated that he intended to work for 5 years. Roger argued that he meant to work “until full retirement,” which was a less defined period of time, but the court’s only evidence to work with was his deposition testimony, which was clear about the 5-year term.

Roger pointed out that the statute only applies to contracts that last for terms longer than one year, and that contracts for terms less than a year do not need to be in writing. According to Roger, he performed his portion of the contract within one year of agreeing to it so it did not have to be in writing in order to be enforceable. The court once again disagreed. Roger could not have completed his contract within one year because, to the best of anyone’s knowledge, the contract was for a 5-year term. Performing part of his work in the first year was not the same as completing the contract. Because the statute of frauds did apply here, the contract was unenforceable because it was not in writing.

Roger then argued that the deferred compensation he claimed was a wage under Indiana law, Indiana Code Section 22-2-5-1. Under the statute, wages include all amounts paid as compensation for labor or services rendered. Deferred compensation does count as a wage. In this case, though, as far as the court could determine, the extra $1,000 a week was to be compensation conditioned on Heart City becoming profitable after 5 years. As such, it did not count as a wage. The court of appeals concluded that the trial court was correct to dismiss the case without a trial. Rodts v. Heart City Automotive, Court of Appeals of Indiana, No. 20A04-1004-CT-249 (9/7/10)

Point to remember. Always put contracts in writing! It could avoid the type of litigation illustrated in this case.

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