WHAT HAPPENS TO SALES COMMISSIONS NOT YET PAID WHEN THE EMPLOYEE QUITS OR IS TERMINATED?

Intro:  Disputes over sales commissions are often the subject of litigation. The stakes are high. Under the Massachusetts Wage Act, a commission can be considered wages. Failure to pay wages can result in liability for triple damages, payment of the employee’s attorney’s fees, litigation costs, and 12% interest.

Commission Defined:  Massachusetts courts have generally defined a commission as a payment of money due to an employee based on sales.  A true bonus is not a commission.  A true bonus is not based on an individual’s employee’s sales.  It may be wholly discretionary or may be based on the overall profits of the company.  A bonus is not subject to the Wage Act.  However, just calling a payment a “bonus” or a “sales bonus” doesn’t itself exclude it from the statute.

The Wage Act:  The Massachusetts Wage Act was enacted to prevent the detainment of wages. G.L. c. 149, Secs. 148, 150.  The Wage Act is a powerful statute for employees, and it can be enforced by the Attorney General.  Failure to pay wages when they are due can result in a lawsuit by the employee.  The employer will be liable for triple damages for unpaid wages, interest at 12 percent, and the employee’s attorney’s fees and costs.  There is also personal liability for the officers of the company, which could include managers or members of a limited liability company.

How the Wage Act Applies to Commission:  The Wage Act contains the following language: “This section shall apply, so far as apt, to the payment of commissions when the amount of such commissions, less allowable or authorized deductions, has been definitely determined and has become due and payable to such employee, and commissions so determined and due such employees shall be subject to the provisions of section one hundred and fifty.”

What Does Definitely Determined Mean?:  Definitely determined means that you can determine it arithmetically.  You can calculate how much is due.  It’s an open question as to when they must be calculable. 

What Does Due and Payable Mean?:   Commissions are “due and payable” when any contingencies relating to their entitlement have occurred.  

Other Key Language of Statute:   “No person shall by a special contract with an employee or by any other means exempt himself from this section or from section one hundred and fifty.”  This “special contract” prohibition creates confusion.  Employers, on the one hand, are allowed to create their own policies and define when a commission is due. But if they are too draconian in denying commissions, some courts will rule that you are exempting yourself from the Wage Statute by a “special contract,” which is not allowed.  This is especially true if the employer fires the employee.

Continued Uncertainty:  What if the employee is fired or quits before payment is made?  When do you have to be able to calculate it?  When does it have to be due and payable?  You should see by now there is no easy answer to this question.  The law is far from an exact science.  The answer is, it depends.  A lot depends on the commission contract or compensation plan.  A lot may depend upon whether the commissions were to be paid in the near future or distant future.  A lot will depend on how good the lawyers are for each side of the dispute.  And a lot will depend upon how the particular judge in your case views the law, at least until we get some more clarification on the statute.  Just yesterday, the Massachusetts Supreme Judicial Court heard arguments on these issues in the Parker v. Enernoc, Inc. case.  We may get at least some new clarifications on these issues next year.  Until then, I have some takeaways below.

The Takeaway for Employers:  Commissions agreements have to be drafted extremely carefully.  You can change them at any time, but only prospectively.  There are a few tricks of the trade that can protect you.  Moreover, when an employee leaves and commissions are in their pipeline, the employer must proceed with caution.  This is even more so if the employee is terminated.  If it can be inferred that you fired the employee to deprive the employee of commissions, you might be held liable for the commissions no matter what your contract says.  This is a doctrine called the covenant of good faith and fair dealing.  Some courts would triple those damages, others would not.  The Massachusetts SJC may decide whether tripling is proper in the Parker case.

The Takeaway for Employees:  You probably cannot negotiate the language of your contract unless you have a lot of bargaining power.  But if you can, it would be worth hiring a well-versed lawyer.  You might be able to negotiate if you are a part-owner of a small corporation or LLC.  The Wage Act will still apply to you.  While you are employed, there are steps you can take to document your earned commission.  And if you are no longer working at your employer, but you have earned commissions in your pipeline, make sure you go to a lawyer who really knows what they are doing.  These claims can be screwed up easily.

The above is general information and not legal advice.

Adam P. Whitney, Esq.

[email protected]

617-338-7000