• Commission Plans: An Incentive To Put Them In Writing
  • April 21, 2004 | Author: Andrea G. Chatfield
  • Law Firm: McLane, Graf, Raulerson & Middleton Professional Association - Manchester Office
  • Commissions can promote the entrepreneurial spirit in employees. They can effectively reward employees for their work and provide them an incentive for growing the employer's business. Commissions, however, are wages. If there is a disagreement between the employer and an employee as to what commissions are owed to the employee, and there is no written commission agreement, or there is an ambiguous commission agreement, the employer can end up owing more commissions than it ever intended.

    The New Hampshire Supreme Court recently upheld an award by the New Hampshire Department of Labor (DOL) of over $25,000 in unpaid commissions to one former sales manager and over $40,000 to another former sales manager because of an ambiguously worded commission plan. New England Homes, Inc. v. Guarnaccia Irrevocable Trust et al., Nos. 2003-271 and 2003-272 (April 16, 2004).

    New Hampshire law requires employers to inform employees in writing as to their rate of pay and the specific methods used to determine wages. Also, employers must notify employees in writing of any changes to such information prior to the effective date of the change. RSA 275:49; NH Admin. Rules Lab 803.04. These rules govern commission plans. This means that commission plans must describe in sufficient detail, at the very least: (1) how they will be calculated; (2) what conditions the employee and/or the employer must satisfy for the commission to be considered "earned"; (3)when are the commissions due and payable; (4) the frequency of paying them; (5) whether the employer pays draws against commissions, and if so, when are such draws reconciled against earned commissions; (6) what may be deducted from commissions; (7) what commissions will the employee be entitled to when employment ends; and (8) any other material provisions regarding the earning and payment of commissions.

    If such terms are not described sufficiently in writing and given to the employee prior to earning the commissions, the DOL and the New Hampshire courts will construe commission arrangements based upon what an employee reasonably believes them to be. For example, absent a specific written agreement, or conduct which clearly demonstrates a different compensation scheme, a terminated employee is entitled to be paid for commissions on all orders accepted by the employer even though payment is made after the date of termination. Galloway v. Chicago-Soft, Ltd., 142 N.H. 752 (1998). In the Galloway case, the terminated sales manager sought payment for commissions on all orders solicited by him which had been accepted by the company prior to his last day of employment. The company asserted that Galloway should only be entitled to commissions on sales collected by the company up through his last day of employment. The company relied on the fact that, over the term of Galloway's employment, commissions were paid only when the company had been paid by its customers.

    This argument was unpersuasive to the court which commented that "such evidence is not clearly indicative of whether an agreement existed whereby Galloway earned commissions when sales were collected." In ruling that Galloway was entitled to commissions on all orders taken by him and accepted by the employer prior to his termination, the court stated: "If an employer intends for commissions to be calculated differently, either the contract language or the employer's acts must unambiguously demonstrate a departure from the general rule; otherwise, the employee is entitled to commissions on sales closed as a matter of law."

    As the recent Guarnaccia case demonstrates, even if there is a written commission plan or agreement in place, it may not be clear enough. R.J. Guarnaccia and George Cooley were sales managers for New England Homes which sells modular homes. Their commission structure was set forth in a Letter of Understanding which stated that commissions were 3 1/2 % of the net price of the modular home. The Letter also stated that such commissions were "credited" when a sales contract for a modular home was paid in full. This usually happened when the home was delivered and set. The Supreme Court stated that the term "credited" was ambiguous because it could mean "earned" or it could just as plausibly mean "payable" thereby affecting only when the commission was to be paid out. Because the Letter of Understanding did not clearly state when the commissions were earned or vested, the Court followed the general rule stated in Galloway that commissions are earned when the sales orders are accepted. Therefore, Guarnaccia and Cooley were entitled to unpaid commissions (over $25,000 for Guarnaccia and over $40,000 for Cooley) on modular homes they had sold prior to leaving the Company but were still in varying stages of manufacture and delivery.

    It is important to remember that the DOL has ruled in favor of employers in cases similar to Guarnaccia and Galloway when there is a clearly worded commission plan. For example, in a DOL decision from a few years ago, a former sales employee likewise sought commissions on sales orders of software training courses that he had booked prior to leaving the employer, even though such courses had not been delivered prior to the employee's last day of employment. The DOL ruled in favor of the employer because the commission plan in that case clearly stated on the first page that when an employee left, he or she would only be entitled to commissions on courses that had been "delivered" to the customer prior to the employee's last day of employment.

    Thus, all employers who pay employees commissions should ensure that they have clear and complete commission agreements or plans that have been distributed to employees prior to the employees earning commissions, and that such agreements or plans are updated in writing prior to any changes taking effect. It is also advisable that employees sign a copy of the commission agreement or plan. If such agreements or plans already exist, employers should take a look at them to determine if they clearly commit to writing the exact basis on which commissions are to be earned and paid, including what all the prerequisites are to commission entitlement. Special attention should be paid to what commissions will be earned at the time of employment termination and how and when they will be paid.

    Finally, many employers do not realize that if commissions are paid to non-exempt employees (those who are not exempt from the overtime requirements of the Fair Labor Standards Act), such commissions will impact the rate of overtime paid to such employees who work more than 40 hours in a workweek. Basically, such commissions must be included in the calculation of the employee's regular rate of pay for determining overtime premiums. This is true regardless of whether the commission is the sole source of the employee's compensation or is paid in addition to a guaranteed salary or hourly rate, or on some other basis. When commissions are paid on a basis other than weekly, the employer will have to allocate the commissions over the employee's workweeks and recalculate the overtime premium for those workweeks that the employee worked more than 40 hours in the workweek. 29 C.F.R. sec. 778.117 et seq. For more information on how such calculations should be made, and how to determine if the employee is exempt or non-exempt, employers should consult the federal wage and hour rules and their employment law attorney.