Paying Commissions to Terminated Employees
jah819
14 Posts
We are attempting to establish a written policy for Sales employees who separate employment and have earned commissions prior to their last day. Our sales employees earn a base salary on top of their commissions. We understand that commissions are considered earnings; however we are bouncing around ideas on a written policy. One thought is to simply calculate the commissions earned up to the last day and pay the amount on the last pay check. Another thought has been to pay the last commissions in the form of a severance agreement. Any thoughts? Thanks!
Comments
If the severance agreement is structured as a lump sum, offered in exchange for a waiver or some other form of agreement where the employee gives something up in exchange for the commission, then I think you cannot include the commission earned in the severance payment amount. Since the employee is legally entitled to any earned commission, the employer can't hold the commission payment out as the "carrot" for a severance agreement.
The last paycheck idea is a good one, so long as the commissions can be calculated in time to deliver the last paycheck in accordance with state law. If the commissions hinge on customer payment, or other delayed income, it may not be possible to pay commissions in time for the last paycheck (i.e., most states tell an employer when they have to pay the last paycheck for a separated employee).
You will want to be careful that you are consistent in your definition of when a commission is earned. Some companies use the date of the signed contract but many others use the payment or delivery date. These choices are less straightforward if you also pay on retention or profitability. Having a single written definition of on what date these various items become “earned” will go a long way in keeping you out of trouble. Once earned, you should consider the commissions the same as any other type of pay. In general, you get to write the rules but you must comply with what you have written.
No, because if you define a commission as 'earned' on delivery date, and the employee quits before that date, then that person was not an employee on the date the commission is earned.
Example: John works an account and sets up the contract on June 15th. John quits on July 1st. John is replaced by Mary. On October 1st, the project is delivered/paid and the commission is "earned." Why would you want to pay John for that commission if Mary had to deal with the project for the last 3 months?
This can be an extremely slippery area--especially if you are in California. You should have a policy defining when commission is earned, I do not know what type of businees you have, but if you have sales which are large with multiple payment terms (i.e., 60, 90 days, etc) you could run into problems. With my previous company we paid 50% of commission upon "booking" and 50% upon payment from the customer. Additionally, each sales person signed a commission agreement (annually) which outlined the commission payment terms and included the payment conditions. Our HR attorney had indicated that the termination conditions (of the commission agreement) state that any unpaid commissions would be paid if payment was received within 30 days of termination. This essentially was seen as a company's good faith effort. Our HR attorney had indicated that it is critical for a company to define when commission is earned and how commission is paid upon termination to avoid litigation. Apparently the courts generally rule in favor of employees when these "issues" are not defined.
Lynn B
I've been through this on a multi-state basis and there is variation both at the state and circuit level and, in some cases, the issues are in case law not statutory law so it can be difficult to find on your own. The more compensation that might be excluded by your definitions, and the more employee friendly the states and circuits in which you operate, the more important it will be that you consult. If you hold back a percentage for chargebacks, you'll want to look into the timing of releasing the hold back account as well.