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This article addresses a problem that arises frequently in my law practice, namely, unilateral changes made by a principal to the sales commission agreement. These changes often happen quickly and without warning. Needless to say, unplanned reductions in take-home pay can cause significant angst for both the salesperson and his or her spouse.

The Big Question

“What should you do when your principal unilaterally reduces your commission rate?” The answer is: “That depends.” We are currently litigating a case that involves this exact problem. The key facts of that case are as follows:

• Our client had an oral agreement with his principal that he would be paid sales commissions at the rate of five percent of any new automotive production business he solicited and procured. The standard in the automotive industry is that absent an agreement to the contrary, commissions on sales procured by the sales representative are paid for the life of the part.
• A private equity firm purchased the principal approximately two years before the lawsuit was filed. (Please refer to my article entitled “Beware of the New Owner” published in the April 2021 edition of Agency Sales magazine.)
• The private equity company unilaterally instituted a series of commission reductions over the course of approximately 15 months after my client procured new sales totaling approximately five million dollars annually. These sales are expected to run for approximately five years. These commission cuts were from five percent to three percent; from three percent to one percent and from one percent to zero percent.
• Our client did not consent to the commission reductions.
• In this case, we made the strategic decision to wait until the new business was pretty well maxed out before taking action.

The Solution

We filed a lawsuit for underpaid sales commissions and for breach of the commission agreement. We later amended the complaint to add a claim for future commissions and for violation of the Michigan Sales Representative Commission Act. The sales commissions are expected to total approximately one million dollars over the life of the parts.

I expect that the attorneys for the principal will argue that my client consented to the commission reductions by continuing to accept the monthly commission payments after the reductions were imposed. Therein lies the dilemma for the sales representative. If the sales representative consents to the commission reductions, then he or she will be stuck with them. If the sales representative objects, he or she will likely get fired.

So, what do you do if this happens to you? My recommendation is that you do the following:

• Do not agree to the commission reduction either in writing or orally. It is usually better to stay silent than to object and get fired. That allows the sales representative to select the right time to fight this battle. In resolving the dispute as to whether cashing the checks constitutes consent, the tie-breaker can often be that the principal could have forced the sales rep to decide whether to accept the reduction or be fired. If the principal chose not to do that, it is not the sales rep’s fault. It is my experience that the principal often does not take the step of forcing the sales rep to decide. I think that the reason for this is the desire to avoid conflict. Use that to your advantage.
• Continue to do your job and do the best you can to obtain new business. It is possible that you can live with the commission reduction, and you may be able to make more money in the long run by staying. By not consenting to the reduction, you should be able to claim the underpayment of the commissions if your relationship terminates down the road.
• If you decide that you can no longer work for the company, then you should consider voluntarily terminating the relationship as a result of the unilateral commission reduction/breach of the commission agreement. You will need to decide whether it makes financial sense to sue them or to just focus on your next job.

There is no legal requirement in Michigan that the sales representative must object to the unilaterally imposed commission reduction, i.e., silence is not generally consent. Often the best course of action is to make the decision to live to fight this battle another day or week or month or year. A key decision for the sales rep to make at this time is like the Clash song — Should I Stay or Should I Go. My philosophy is that it is not generally a good idea to stay with a company who disrespects you and your commission agreement. As I wrote in my book Victimization Begets Victimization, generally, things get worse and not better. On the other hand, it is important to select the right time to leave. For example, maybe wait until you get the purchase order for the large program you are working on. In any event, it may be a good idea to get another job lined up before you leave.

Michigan has a six-year statute of limitations for breach of contract claims. This means that an aggrieved party can go back six years for any contract breach such as a unilateral commission reduction. On one occasion, I recommended to my manufacturers’ representative client that he wait at least two years before filing a lawsuit for commissions on automotive production parts. He was terminated just after a new program was awarded. I wanted to make sure that his principal kept the program and that it did not get canceled. It is generally better to have a good history of sales and dollars in the hopper before filing a lawsuit. A claim for commissions on sales dollars already received is stronger than a claim on possible future sales dollars.

It is up to the sales representative to choose the right time to leave. Maybe the time of the commission reduction is not the best time to leave. Each situation is dependent on the individual facts and the circumstances of the sales representative and the law in the applicable state.

Conclusion/Moral of the Story

It is important for a sales representative to have a strategic plan as to how to handle a situation where the principal unilaterally implements a commission reduction. Talk to a lawyer who understands your business and is familiar with litigating sales commission disputes. You will need to decide whether it’s best to immediately protest the commission reduction and likely get fired or wait and fight this battle at another time. As always, a good place to find an attorney to help you navigate through this is the list of MANA qualified attorneys.

MANA welcomes your comments on this article. Write to us at [email protected].