Compensation

Commission Structure Doesn’t Justify Failure to Pay Wages Due at Termination

by Erica E. Flores

Commission payments often make up a significant portion of the compensation paid to employees who work in sales. The structure of commission payments varies from industry to industry and from region to region, but commissions serve the same basic purpose: financially motivating employees to increase their sales with the promise of receiving higher income.

Massachusetts

The Massachusetts Wage Act requires employers to pay all earned wages in full, including earned commissions, on the day an employee is discharged. So what should you do if your commission structure provides that commissions will be paid on specified dates or requires employees to be employed by the company on the date of payment in order to receive their commissions?

Can you rely on your own policies to refuse to pay earned commissions upon termination? Or does the Wage Act govern? In a recent opinion, the Massachusetts Appeals Court addressed those questions and, predictably, sided with the employee.

Salesman Refuses to Agree to New Commission Structure

In 2008, East Longmeadow-based Hampden Engineering Corporation hired “Roger” as a regional sales manager. Roger earned a salary of $45,000 plus a 1% commission on all sales in his region, payable at the end of the calendar year.

In 2010, Hampden modified its commission structure. The new structure provided for commissions to be paid at three different levels: 1% on all sales up to $2 million, 2% on all sales above $2 million, and 3% on all sales above $3 million. Under the new structure, Roger earned more than $40,000 in commissions in 2010. For 2011, however, the company rolled out yet another new commission structure, eliminating all commissions on the first $1 million in sales.

Hampden presented the new commission structure to Roger in February 2011, and when he refused to sign it, the company terminated his employment. At the time of termination, Hampden paid Roger his accrued salary and vacation time, but it refused to pay him any commissions on sales he had completed during the 2011 calendar year. Roger filed suit.

Roger claimed that Hampden violated the Wage Act by failing to pay him $8,462 in commissions he alleged he had earned prior to his March 17, 2011, termination. After a bench trial, a superior court judge found in Roger’s favor and ordered Hampden to pay him triple damages plus interest, attorneys’ fees, and costs. Hampden appealed.

Commission Structures Don’t Override Wage Act

On appeal, Hampden didn’t dispute that Roger was its employee. Hampden also agreed that the Wage Act would apply to any commissions if the amount had been “definitely determined” and was “due and payable” when he was terminated. However, Hampden argued that the superior court erred when it concluded that Roger’s claimed commissions met that standard.

First, Hampden argued that the commissions weren’t “definitely determined” because it had changed the payment structure for 2011 and, presumably, because Roger hadn’t yet agreed to the changes. The appeals court rejected that argument, however, because Hampden had apparently stipulated at trial that if Roger prevailed, he would be entitled to $8,462 in commission payments.

Next, Hampden argued that the commissions weren’t “due and payable” when Roger was terminated because under its commission structure, commissions are paid at the end of the calendar year, and an employee must be employed by the company at that time to receive them. The appeals court rejected that argument as well.

The court’s reasoning was twofold. First, the court concluded that any ambiguity in Hampden’s commission structure had to be interpreted against the company and in favor of Roger. More important, the court relied on the plain language of the Wage Act to rule in favor of Roger.

As the court pointed out, Section 148 of Chapter 149 specifically requires employers to pay earned commissions in full on the day of discharge and expressly states that an employee may not exempt himself from that requirement through an agreement with his employer or in any other way. As a result, Hampden’s commission structure couldn’t override the requirements of the statute even if Roger had agreed to it.

Takeaways

Even though this decision isn’t considered binding precedent, it could have significant consequences for employers whose employees earn commissions. Indeed, the appeals court determined that a commission must be treated as “due and payable” upon termination even if it’s not yet due and payable under the employer’s commission agreements or policies.

In other words, the court concluded that because the requirements of Section 148 are mandatory, all earned commissions must be paid upon termination even if they wouldn’t otherwise be “due and payable” under the employer’s own compensation arrangements.

So what could this ruling mean for your business? If you pay commissions, consider reviewing your commission structure and the compensation arrangements you have in place with the employees who receive them.

If your internal rules provide for commission payments to be deferred to a later date or require employees to be employed on a particular date to receive their commissions, you may want to revise your procedures to make sure your payment practices satisfy the Wage Act’s requirements for terminated employees.

As always, if you’re unsure whether your policies comply with the law or you have any questions about the changes you may need to make, take the time to consult with your employment counsel.

Erica E. Flores is an associate at the firm of Skoler, Abbott & Presser, P.C and an editor of Massachusetts Employment Law Letter. She can be reached at 413-737-4753 or eflores@skoler-abbott.com.