We are looking to redesign our sales commission plan and are wondering if the following is legal? Ex: Commission for Q4 sales is paid out at the beginning of Q2 – While the sales person made their Q4 quota, they didn’t make their Q1 quota. Therefore, the commission they would have received beginning of Q2 from Q4 sales is now effected (sliding scale downward) based on their not making Q1 sales quota. Essentially, commission would be effected on a sliding scale upward or downward based on current and previous performance results. Note: We have offices in CA, MA, NY and PA.
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Thank you for your inquiry regarding the legality of a sales commission plan structured on a sliding scale in which later performance affects the rate of the prior quarter’s commissions.
In general, the idea of basing a commission payment rate across multiple periods of performance would be acceptable, as it is generally within the employer’s discretion to structure commission plans to best serve the needs of the business. However, there are two important points to consider for your plan.
First, note that both California and New York have specific documentation/contract requirements when workers are paid on a commission basis. For example, California law requires that employees who enter into employment agreements that involve compensation, even in part, on a commission basis be provided a written contract that sets forth the method by which this commission will be computed and paid.
While this requirement seems simple enough, the agreement must describe the method by which the commission will be computed completely and in detail. For a fluctuating plan like that you describe, this may require particularly skillful drafting from qualified employment counsel to ensure that the terms of the agreement are clear to employees and that the employer’s intended compensation plan is set forth accurately.
The second important consideration is determining when the commissions will be “earned” by the employees. This is important both to determine commissions due to employees upon termination as well as to comply with state wage payment laws.
New York and Pennsylvania both have specific requirements for the timely payout of commissions. For example, the Pennsylvania Wage Payment and Collection law defines wages to include all earnings of an employee, regardless of whether the payment is determined by time, task, piece, commission, or other method of calculation.
This law requires wages to be paid “on regular paydays” designated in advance by the employer and, unless there is a contract to the contrary, requires wages to be paid within 15 days of the end of the pay period. New York law requires all wages, salary, draws, commissions, and other monies earned to be paid no less frequently than once in each month and no later than five business days after the commission has become earned.
So the nuance here is clearly designating when commissions are actually earned by the employee – in other words, has the employee earned his or her commission upon the customer’s payment for the good or service, at the end of the operating quarter (Q4), or, because the amount is subject to change, at the end of the two-quarter evaluation period (Q1).
This is another area of the plan that will require skillful drafting by employment counsel to ensure that the plan meets the timely payment requirements of the applicable states’ laws.
In general, we would always recommend that a commission agreement be drafted and/or reviewed by employment counsel to ensure that it is clear and compliant with state and federal laws. In your particular case, because the plan you propose would involve multiple states – each of which has very specific and nuanced wage laws – we especially recommend recruiting the assistance of qualified counsel with experience in these states to assist you with the agreement.