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February 28, 2022
Idaho Supreme Court Upholds Compensation Agreement

The Idaho Supreme Court had the opportunity to revisit and reaffirm its previous decisions on employment contracts controlling compensation above and beyond a base salary or hourly wage. The previous decisions primarily instructed that the terms of the agreement will govern if they are correctly drafted.

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The recent case arose from Nathan Smith’s claim under the Wage Claim Act alleging Kount, Inc., improperly refused to pay a bonus after he resigned from the company. To support his claim, he introduced language in a 2018 employment agreement governing the terms for incentive compensation, a plan which was updated annually by the company. The plan allowed for a set annual base salary and quarterly variable compensation based on specific metrics for his business development position.

The lawsuit focused on language in three sections of the agreement. Section 2 provided that incentives would be earned upon performance of goals. Section 3 provided that no amounts would be earned until an applicable event or activity was complete. Section 6 provided that receipt of the incentive payments was contingent on completed reports and an employee being in good standing at the time of payment. Importantly, Section 6 stated unpaid incentives would be forfeited in the event an employee separated from the company before payment was made, and incentives would be paid 45 days after the end of each quarter.

In 2019, the company’s third quarter (Q3) fell on September 30, 2019, requiring incentives to be paid on November 15. On September 17, Smith submitted a two-week notice of resignation, stating his last day would be the end of the quarter. He met with a supervisor to discuss the notice of resignation, disclosing he was leaving for another job. His supervisor told him he wouldn’t receive his incentive compensation unless he remained employed on the scheduled payment date.

Later, in response to a request by Smith, the company informed him that no exception would be made. He left the company before the scheduled payment date and was provided his base salary through his last day but no incentive compensation for Q3.

Smith filed suit against the company about a month later alleging a violation of the Idaho Wage Claim Act based on the refusal to compensate him for Q3 incentives. Both parties asked the district court to find in their favor without a trial. The court granted the company’s request and denied Smith’s because it found the agreement unambiguously required continued employment as a condition precedent to earning the incentives.

Court’s Decision

Reviewing the Wage Claim Act and prior precedent, the supreme court affirmed the district court’s decision. The Wage Claim Act requires employers to pay the minimum wage for all hours worked and pay their employees on a scheduled payday at least once a month. Further compensation in Idaho is subject to negotiations between the employer and employee, allowing freedom to employers and employees to determine any additional compensation.

Specifically, the Wage Claim Act directs that upon separation, the employer is to pay “all wages then due the employee” within 10 days or on the next payday, whichever is sooner. To determine whether wages are “due” under the statute, the supreme court has historically looked at “whether the employee is entitled to the wages for services rendered or whether there is more they must do in order to be entitled to the wages.”

In this case, the narrow question of law was whether the agreement between the parties stated that incentives were “due” to Smith on the date he resigned. Referring to Sections 2, 3, and 6 of the agreement, he argued the agreement made a distinction between when wages are “earned,” when they are “due,” and when they are “paid,” suggesting the agreement, together with the Wage Claim Act, required the earned but unpaid commission to be paid to him at the time of separation. He contended that the language of the Act accelerated the payment date and that the language in Section 6 only identified the timing of the payment, not the conditions for “earning” it.

The Supreme Court disagreed because the Wage Claim Act focuses on whether wages are due, not whether they are earned. Thus, the proper inquiry for purposes of the Wage Claim Act was whether “there was more that Smith needed to do to be entitled to wages” under the agreement. The Supreme Court then read all contested sections of the agreement together, ruling that the incentives weren’t “due” to Smith because he wasn’t an employee 45 days after Q3 ended.

According to the Supreme Court, Smith’s arguments failed to give effect to all language in the agreement as a whole. It said, “Regardless of the precise phrasing used to set the conditions for payment, Smith needed to satisfy another condition before the variable compensation was due to him; namely, he needed to remain an employee in good standing on the date payment was to be made.” Smith v. Kount, Inc.

Takeaways

The supreme court affirmed that Idaho law doesn’t limit the parties’ ability to negotiate for compensation over and above a base salary. Accordingly, where an agreement is reached for additional compensation, it’s very important that the employment contract’s terms are properly drafted. When the additional compensation (whether it be for commissions, bonuses, or incentives) is unambiguously described in an agreement, Idaho courts will simply enforce the terms of the parties’ contract. Therefore, we recommend all employers work with experienced employment counsel to confirm the compensation terms are correctly drafted to reflect the parties’ intentions.

Jason R. Mau is an attorney in the Boise office of Parsons Behle & Latimer. Mau is a member of the firm’s Litigation, Employment, and Real Estate practice groups and concentrates his primary practice in the areas of employment, commercial, real estate, and construction litigation, with experience in cases before the District Court of the United States and State of Idaho. He can be reached at 208-562-4898 or jmau@parsonsbehle.com.

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