Commissioned Employees – Draft an Agreement Now, Avoid a Hassle Later

15 February 2016 Labor & Employment Law Perspectives Blog

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:

  1. 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.
  2. 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.
  3. Timing of payment: When are commissions earned and payable? Quarterly? Each pay period? Address up front how and when the employee will be paid.
  4. 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.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services