In most states, companies have substantial discretion to change their commission structures and or bonuses. However, when those changes reduce commissions on deals that have closed, which arguably the employee or independent contractor has already earned, the employer can get into trouble and/or be liable for payment of those “earned” commissions.
Disputes also arise when an employer’s bonus/commission plan states that you forfeit your right to payment of commissions or bonuses, if you are not employed/an independent contractor on the date that the payments are due to be paid. This is typically called a “you must be present to win” provision.
Disputes arise when an employee or contractor continues working after a company announces changes to its payment structure that reduce commissions. If the salesperson does not object in writing and continues to work after notice of the changes, many times the salesperson will waive his or her rights to the old, higher commission structure.
Another situation that leads to disputes and legal claims occurs when a salesperson is fired or quits prior to the time that commissions/bonuses have been paid. In that situation several factors are relevant regarding whether or not there is a legal obligation to pay a commission/bonus:
- Is the plan in writing?
- Are the terns on how you earn and are paid commission/bonuses, unequivocal or ambiguous?
- How are the earning of commissions or bonuses are defined?
- What facts determine whether or not a sale is final and the commission is earned?
- Are there any claw back provisions such that a sale that was initially made and is later canceled by the customer?
Even when a plan is not in writing, commissions may be legally owed if there has been a long-standing custom, pattern or practice of paying commissions or bonuses under particular circumstances. If an employer consistently makes payments and then doesn’t pay one particular individual that could lead to the employer being liable for illegal discrimination. What can make these cases time-consuming and unpredictable is that they are often based on the particular facts of a particular situation, which will vary between companies paying commissions and also very over time within a particular company.
Even if a plan is clear, under certain circumstances, a contractor or employee may be able to recover the commissions or a cash equivalent under other legal theories. These legal theories are based on the principles of fairness and equity. The legal terms are recovering damages under causes of action for “promissory estoppel,” “unjust enrichment” and/or “quantum meruit.”
In addition, if a company is intentionally acting in bad faith and/or trying to trick salespeople regarding a commission or bonus plan, a salesperson may be able to pursue a fraud claim. However, it is more difficult generally to win a fraud claim than a claim based on fairness and equity.
Six Key Takeaways
- If you are a company paying commissions or bonuses, put your plan in writing so there is no misunderstanding, confusion or mistakes
- If you are entitled to receive commissions or bonuses, obtain a copy of the plan and if the metrics or provisions are unclear, get a manager to clarify–in writing–any uncertainties
- If you resign prior to the date the commission is paid, you are at risk for not receiving your commissions
- Poorly worded or confusing metrics and provisions about payment of commissions/bonuses can be held against a company, if the company wrote the plan– so companies should take time to get it right
- A company should be consistent with regard to payment of commissions and bonuses—inconsistencies can subject the employer to liability for discrimination claims
- If a company does not have a clear written plan, then they may unwittingly become liable to pay bonuses and commissions based on custom, pattern or practice.