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:
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:
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.