Commissions and Non-Discretionary Bonuses
September 15, 2020
By: Colin A. Walker
Poorly written (and unwritten) commission agreements have spawned a plethora of litigation. Commissions should be carefully thought-out and set forth in a clearly written commission agreement signed by the company and the C-Level executive. The following are often sources of misunderstanding, disagreement, and litigation:
- When is the commission earned? When a sales contract is signed, when the customer receives the product, or when the customer pays?
- Does the executive have to be employed at the time the commission is earned to be entitled to receive the commission?
- What happens if another employee participates in the events that lead to the sale? Are both entitled to the commission and, if so, in what proportions?
- What happens if the executive resigns during the sales process? Is the executive entitled to all, some, or none of the commission?
All of this is entirely dependent on how the commission agreement is written. Yet, surprisingly, many companies have poorly written commission agreements or none at all. In this case, a court called upon to decide a case involving a commission payment will have to interpret an ambiguous document and/or hear evidence of verbal conversations, emails, text messages, customs, practices, etc., to determine what the agreement was. It is very difficult to predict how a judge or jury would sort this out.
Similar issues arise with bonuses. It is usually to the company’s advantage to keep bonuses entirely discretionary. However, talented C-Level executives often demand detailed non-discretionary bonuses, and have the leverage to bargain for them. Great care should be taken to set forth all the metrics upon which a bonus is based. Misunderstandings and disputes often arise from poorly defined terms. In a complicated business, it may be necessary to provide a formula for determining entitlement to the bonus or the amount of the bonus.
Keep in mind that commissions and non-discretionary bonuses are “wages” under wage claim laws, most of which contain provisions for fines, penalties and attorneys’ fees for actions by employees who have not been properly paid. Therefore, the stakes are high.