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As independent sales representatives, you’re all too aware of the issues surrounding payment of commissions from your principals:

• When are they earned?
• When are they payable?
• Your entitlement to commissions on backlog orders upon contract termination.
• Your rights if the principal doesn’t pay.

These same issues pertain to the payment of commissions to your sales employees.

You’re also probably aware that many states have enacted statutes protecting your rights as an independent sales representative to payment of commissions by your principal. Many of these statutes levy multiple damages and attorney’s fees upon the principal for failure to pay commissions to which the independent sales representative is entitled.

You may not be aware that many states have statutes that address the issue of sales commission payments by the employer to its employee. Other states have case law prohibiting employers from deducting previously paid draws against commissions from final salaries due on termination or failure to pay commissions on termination.

Understanding State Law

Employers are encouraged to understand the state law in which your employees are located and put sales commissions plans for your employees in writing. Employers are also advised to:

• State how commissions will be com­puted, when earned and when paid.
• How deductions (for draws against commissions) will be taken.
• How and when commissions will be paid on termination.

Be Aware of Your State’s Statute and Case Law

Two states — New York and California — have laws which require an employer who pays employees on a commission basis — in whole or in part — to put the commission agreement in writing and provide copies of the signed agreement to the employee.

Additionally, both statutes require that the contract describe the method by which the commissions are to be computed and paid. New York’s law has additional requirements that the contract identify when commissions are earned and what happens upon termination of employment to the salesperson’s wages, salary, draw and commissions which have been earned.

State Wage/Sales Rep Statutes

Other states have wage statutes that define the term “wages” to include sales commissions. A dispute over what an employee is owed can result in a non-payment of wages complaint to the state attorney general and, potentially, liability in the form of civil and criminal penalties, multiple damages and attorneys’ fees.

For example, under the Massachusetts Wage Act, commissions are considered “wages” if they are “definitely determinable” and have become “due and payable.” Simply including a clause in a commission plan that an employee must be employed at the time the employer pays commission may not be sufficient if the plan does not clearly address when commissions are “definitely determinable” and when they are “due and payable.” McAleer v. Prudential Insurance Company of America, D. Mass. Feb. 28, 2013. An employer who fails to provide an employee with a carefully-written sales commission plan and then withholds commissions faces exposure to mandatory treble (triple) damages and attorneys’ fees.

The sales rep statutes in some states, such as Georgia, Louisiana, and Tennessee, apply not only to independent sales reps but also to employee sales representatives paid on commission. Louisiana’s statute requires that commissions be paid to an employee within 30 working days after termination if there is no written contract or provision which addresses payment upon termination.

State Case Law

Certain other states, vis-à-vis, judicial decisions from their courts, maintain that the employee is not responsible to the employer for repayment of advances or draws against commission that exceed earned commissions if no “express or implied contract for repayment is established.”

For example, the Connecticut Supreme Court held that, absent a specific written contract provision between the employer and employee, an employer could not recover an advance on future commissions from a sales employee by withholding salary owed upon termination of employment. Ravetto v. Triton Thalassic Technologies, Inc., 285 Conn. 716 (2008). This decision is reflective of the trend in many other states suggesting that an employer’s failure to put the commission plan in writing creates a presumption against the employer who seeks to enforce its rights to recoup advances or its interpretation of the commission plan.

Other states, such as Maryland, invalidate employment agreements which require that earning commissions is dependent on factors beyond the salesperson’s control (for example, a provision in a contract requiring the salesperson to remain in the company’s employ to earn his commissions when product has already been sold was held to be invalid). Medex v. McCabe, 372 Md. 28; (2002).

Recommendations

Given these developments in state statutes and case law, employers are advised to:

• Put sales commission plans in writing and require the signature of the employee and employer representative.
• Identify the term of the agreement and when it expires.
• Define how the commission is to be calculated.
• Identify what conditions need to be met to earn the commission.
• Identify when commissions will be paid.
• Clearly define key terms such as “draw,” “advance” and “sale.” Be clear when an advance of unearned commissions is being provided.
• Explain what will happen to an unpaid and/or unearned commission upon termination of employment, and address whether there will be a different outcome if the employee is terminated for cause. Note that in some states, once the commission is “earned” the employer will be required to pay that amount.
• Include an at-will employment provision stating that the employment may be terminated by either party at any time.
• To ensure compliance with your state laws, contact a knowledgeable attorney.