By: James B. Sherman, Esq.
Commission disputes oftentimes are very costly to employers. Whether the commissioned individual is an employee or an independent contractor (e.g. sales representative) most state laws are very unfavorable to employers. Commissions found owing but unpaid can be doubled or even trebled under some state laws and substantial attorney fees are routinely awarded to a successful plaintiff. A recent decision in the federal district court of Minnesota illustrates the high stakes of commission dispute litigation and the critical importance of having a solid written agreement governing entitlement to commissions.
The case involved an account executive who was paid by salary and commissions earned under the terms of the employer's sales commission plan. The account executive was terminated and paid roughly $3,000.00 in commissions but claimed he was owed much more than that - approximately $65,000.00 in commissions for sales "booked" prior to his discharge. Thus, the dispute involved a discrepancy of over $62,000.00 in commissions the employee claimed were still due and owing. The Minnesota Wage Payment Act, under which the employee sued, provides for recovery of up to double the amount of any wrongly withheld "wages" if not paid within 15 days of when due (a multiplier of 1/15th per day), plus attorney fees. Wages under the Act include commissions as well as vacation pay, PTO, etc. Consequently, the employer's exposure in the case was double the disputed $62,000.00 amount - nearly $125,000.00 - plus perhaps tens of thousands in the employee's attorney's fees.
Luckily for the employer its sales commission plan clearly provided that upon termination for any reason, "the commissions paid as of the termination date shall be considered the total commissions earned and payable ..." Based on this language, the court found that even if the employee earned commissions by booking sales, the plan unambiguously provided that he did not have to be paid those commissions once he was no longer employed. The court relied on the Minnesota Supreme Court's ruling in Lee v. Fresenius Med. Care, Inc., which denied a wage claim (in that case, vacation pay) based on a policy that provided accrued and, therefore, arguably "earned" vacation benefits were forfeited/not payable upon termination of employment.
The critical lesson from these cases is that employers who pay anyone - employee or independent sales representative - in whole or in part by commissions are simply foolish not to have solid written agreements. Even a $5,000.00 commission dispute easily becomes $20,000.00, $30,000.00, or more in court under statutory multipliers and attorney fees available in Minnesota and most other states. The employer in the instant case did well to have a clause restricting commissions upon termination; frankly however, the company could have done much more to strengthen its position. For example, had the commission plan defined more precisely that commissions were not earned merely by booking a sale but only after product was shipped and payment received, there may never have been any disputed commissions and a law suit could have been avoided. Relying solely on a forfeiture clause is like having all of one's eggs in one basket and this case could have gone the other way and may still be overturned if the employee appeals the district court's decision.
All too often employers strike agreements over commissions by handshake or through some quickly drafted one page offer letter. Doing so is risky business. The stakes are too high not to use the same kind of care given to any other important contract potentially worth tens, if not hundreds, of thousands of dollars. Considered in this light most employers would no doubt rely on knowledgeable legal counsel to draft employment offers, policies and plans where commissions are concerned.
