There is no shortage of claims brought by commissioned employees alleging the employer either did not pay, or underpaid a commission due the employee. More often than not, neither the employer nor the employee can figure out what (if anything) is in fact owed to the employee. These problems stem from a lack of clarity in defining the commission terms on the front end. A small expenditure of time and thought up front, including following the suggestions we make below, will help avoid complicated claims later.
Some states have tried to remedy the problem of commissions disputes by statute. For example, in California, Labor Code section 2751 requires:
- The employer provides commissioned employees commission agreements in writing
- The agreement contains the method by which commissions are computed and paid
- The employer gives employees a signed copy of the agreement
- The employer obtains a signed receipt from each employee, acknowledging that the employee received a copy of the agreement
Notably, under California law, if the commission agreement expires and the employee continues working for the employer, the terms of the expired contract are presumed to remain in effect until a new agreement is entered.
New York’s Labor Law includes similar strict requirements related to commission agreements. For example, under New York law the agreement must be in writing and contain a detailed description of how wages, salary, drawing account, commissions, and other earned and payable money are calculated. Additionally, if commissioned salespeople are entitled by the agreement to a recoverable draw (an advance on future commissions), the writing also must include the frequency with respect to which the draw is reconciled.
Even if your company does business in a state without a statute specifically addressing commission agreements, it is wise to look to those states that have such requirements for guidance. You can greatly decrease your odds of facing an unpaid commission claim if the parties clearly set expectations up front. For example, a written commission agreement should always be put in place and should clearly address:
- Eligibility for commissions: What must the employee do in order to be eligible in the first place? Must the employee meet a minimum sales threshold? Is there a requirement that the employee submit paperwork indicating she is the person who brought in the client? Litigation often stems simply from a disconnect regarding paperwork to be filled out indicating that a specific sale should be credited to an employee.
- Formula for calculating commissions: This is the trickiest part of the agreement and the most oft litigated. Be sure to clearly explain exactly how commissions are calculated and avoid complicated formulas or calculation approaches as much as possible.
- Timing of payment: When are commissions earned and payable? Quarterly? Each pay period? Address up front how and when the employee will be paid.
- Commissions post termination: In some states (such as California), employees must be paid all earned commissions regardless of whether the employee is still with the company. Accordingly, it is important to address when commissions are earned and how payment works after termination.
By following either the statute of your state or creating an agreement addressing the four points set forth above, you are much less likely to face the daunting task of attempting to reconcile proper commission payments long after the fact.