Compensation, Compensation Administration, Employment Law

Are Contingencies in Commission Agreements Worth the Paper They’re Written On?

Late last year, the Massachusetts Appeals Court ruled that commissions are “due and payable” under the Massachusetts Wage Act at the time an employee resigns or is terminated, even if the employee might not be eligible to receive the payments under the terms of the company’s commission agreement or plan. (See, Commission Structure Doesn’t Justify Failure to Pay Wages Due at Termination).Commission

This spring, a federal trial court in Massachusetts also ruled on an employee’s eligibility for unpaid commissions. Employers that compensate employees by commission should pay attention to these two cases before withholding commission payments from departing workers.

2 Decisions Mandate Payment of Commissions

In Perry v. Hampden Engineering Corporation, the appeals court reasoned that the Massachusetts Wage Act mandates that commissions be paid to employees when they are due and payable, and employers cannot exempt themselves from that time frame through their commission agreements. Because the Wage Act states that employees who separate from employment must be paid all wages they are owed and the Act applies to commissions that are “definitely determined” and “due and payable,” the court held that employers must pay separating employees all commissions that are “definitely determined” at the time of separation.

Last month, a federal trial court in Massachusetts also held that a former employee was entitled to unpaid commissions under the Wage Act despite an explicit statement in the employer’s commission policy that employees who voluntarily resigned were ineligible for incentive payments.

Although the court didn’t rely on the holding in Perry, when taken together, the two cases suggest a judicial trend toward invalidating the type of language that makes the payment of commissions contingent on the employee meeting some specific condition. “Payment contingencies” are common in commission agreements and bonus plans, so the courts’ holdings are significant for companies that pay by commission.

Voluntary Resignation Results in Forfeiture of Commission . . . Or Does It?

“Kevin” sued his former employer, Voya Institutional Plan Services, LLC, for approximately $32,000 in unpaid “bonuses” under Voya’s variable compensation plan. The plan consists of three types of incentive compensation: an individual component, a forfeiture component, and a discretionary component.

The plan clearly states that employees who voluntarily resign are not eligible for bonuses. Kevin and Voya disagreed over the individual and forfeiture provisions of the plan; the discretionary component was not at issue in the case.

An individual bonus is calculated based on a percentage of revenue generated by the employee when he convinces clients to allow Voya to manage their money for at least three months. The forfeiture component is calculated based on a division of the bonus that would have been earned by other employees but was forfeited because they voluntarily resigned. The purpose of the forfeiture component is to compensate remaining employees who assume the workload of the former employee.

Kevin requested a job transfer in 2014. In assessing his application for transfer, Voya reviewed his employment records and discovered that he had lied in his application materials. The company told him that he could either resign voluntarily or be terminated, and he decided to resign voluntarily. In accordance with the terms of the compensation plan, Voya refused to pay him the bonus he earned during the final 3 months of his employment.

Kevin subsequently sued Voya, alleging that (1) he had actually been terminated and was therefore eligible for bonuses under the plan or (2) the bonuses were commissions that he was entitled to under the Massachusetts Wage Act. Although the court refused to hold in Kevin’s favor on the first theory, it concluded that the bonuses were commissions under the Wage Act and were therefore due and payable once they were definitely determined, regardless of the plan’s terms.

When Is a Commission Not a Commission?

Voya argued that the compensation was a bonus, meaning it was outside the purview of the Wage Act because it was based on a continuing stream of revenue rather than a discrete sale. Voya also argued that Kevin hadn’t met an express condition in the compensation plan—that he remain employed until the date of payment—and his failure to meet that contingency meant the bonus was not “due and payable.”

The court rejected those arguments, finding the compensation was a commission because it was based on revenue generated by an individual employee rather than overall business profits. Moreover, there was no legal basis for treating stream-of-revenue compensation differently than revenue from discrete sales, and the compensation was paid routinely, like commissions, rather than infrequently, like bonuses.

The court then concluded that the commissions were “definitely determined” because the parties had agreed to a commission amount, and they were due and payable at the time of Kevin’s separation. The commissions were due and payable upon his separation from employment even though he hadn’t met the plan’s terms because the Wage Act protects against “unreasonable detention” of employee wages, including commissions, and the court was unwilling to sanction a practice it felt would allow employers to use arbitrary contingencies to unreasonably delay such payments.

The court ruled that Kevin was entitled to his unpaid commissions, and the payments were tripled under the mandatory trebling provision of the Wage Act, for a grand total of $96,000. In addition, Kevin was entitled to $35,000 in attorneys’ fees. Israel v. Voya Institutional Plan Services, LLC (D. Mass., 2017).

If it Walks Like a Duck . . .

This case is a good reminder that compensation that looks like a commission, sounds like a commission, and acts like a commission will be treated as a commission regardless of what you call it. Whether the compensation is labeled a bonus, a commission, or anything else, compensation programs that function as commission structures (i.e., variable compensation regularly paid based on individual revenue or sales) will be considered commissions for the purposes of the Massachusetts Wage Act.

In addition, this case suggests that the Perry decision may not be an outlier, and courts may continue the trend of holding that an employer cannot avoid application of the Wage Act—which imposes triple damages and attorneys’ fees on losing employers—by setting up specific conditions in its policies or plans that would relieve it of the obligation to pay commissions. If you are concerned about this trend, contact experienced labor and employment counsel to review your current practices.

AEIS
Join Susan Fentin, of Skoler, Abbott & Presser, P.C., as she presents the preconference workshop, “Avoiding Hiring Landmines: Navigating Pre-Employment Inquiries, Background Checks, Drug Testing, I-9s, and Other Legal Tripwires,” at the 22nd annual Advanced Employment Issues Symposium (AEIS)—being held at the Paris Hotel in Las Vegas, November 15-17. Fentin will also be copresenting the breakout session, “Absence Management in the Compliance ‘Bermuda Triangle’: FMLA’s Intersection with Disability Accommodation, Workers’ Compensation, and Paid Time Off,” with Stacie Caraway of Miller & Martin PLLC. Click here to learn more, or to register today.

Susan G. Fentin, editor of Massachusetts Employment Law Letter, is of counsel at the firm of Skoler, Abbott & Presser, P.C. Fentin can be reached at 413-737-4753 or sfentin@skoler-abbott.com.