common traps for the unwary :: sales commissions

a lot of small businesses compensate their employees through commission plans and similar types of earned bonuses. how commissions are calculated and paid is initially a matter of contract (in massachusetts, anyway). once earned, however, they're treated the same as ordinary wages.

the trap

it's important to recognize earned commissions are considered "wages" in the eyes of the law because we have very pro-employee laws in massachusetts when it comes to compensation. a company's failure to pay wages when they're due and payable can expose the business to treble damages plus attorneys' fees and other costs of collection. in some circumstances, owners & officers of a company can become personally exposed for failing to assure compliance.

ambiguous commission agreements are a frequent source of claims and lawsuits against businesses. unfortunately, ambiguous or poorly drafted commission agreements seem to be the rule rather than the exception for small business. this means a $5,000 commission claim can easily turn into a $75,000 liability once you add in multiple damages, attorneys fees for both sides, plus the fact that interest accrues at 12% per year once suit is filed. and though you may be an honest business owner with a legitimate basis for your interpretation of the commission agreement, you're walking into the courtroom with a strike against you, as most juries believe employers play fast and loose in this arena.

how problems frequently arise

a common area of dispute arises when a business has 2 or more commission-eligible employees participate in closing a sale. beyond the confusion that can occur when the each employee's plan is different, poorly worded plans can result in your business having to pay out more in commissions that the profit that will be earned.

another problem area arises when a business should be paying commissions that come due long after an employee has left (and may even be working for a competitor). careful wording of the agreement can avoid this scenario, but it's not something you can fix after the fact.

the solution

first and foremost, maintain as much consistency as possible across all of your commission agreements. make sure your commission structure results in payments based on actual numbers and comes due only after the company is paid. in some cases it may be most appropriate to create a formula based on actual profit.

it's a recipe for disaster to construct an agreement that calls for the business to pay commissions based on expected earnings (if for no other reason than those earnings may never come to be). you can carve out some limited exceptions (such as the case of partial payments to a departing employee) but these should be carefully planned. you also have to be very careful not to terminate an employee solely because commissions are about to become due.

another option includes making commissions totally discretionary (you'd want to call it a "bonus" instead of a "commission," and would need to put more in place behind it). the practical implication, of course, is that while this may be preferable to the company, many employees and prospective employees could find it unacceptable.

so if you're a ZENLegal client, here's our reminder :: engage your attorney to review or create your commission agreements. it doesn't cost extra, and with his or her assistance you'll be navigating this arena far more effectively.

and if you're not a ZENLegal client... well, why not?

jack speranza is an attorney, small business owner and principal of main street ventures. for 15 years he has helped his companies and his clients strike the right balance between risk and reward by weaving good business, good technology and good law into new services and operations.

common traps for the unwary :: contractor vs. employee

one of the first and most critical needs both start-ups and small businesses confront is -- the simple need to have people around in order to get things done.

hiring your first employee is a major milestone. upon arriving at this point, the business owner's angst is justifiably on the practical (such as wondering how to go about finding qualified candidates. or questioning what skills, traits and characteristics are really needed to make the person successful) while these considerations are critical, they can often overshadow less immediate concerns.

you'd do good to ask "what less immediate concerns?" hiring an employee also means preparing to manage quite a bit of additional overhead (both in terms of time and and in terms of expense). among these are ::

  • acquiring and paying for workers compensation insurance
  • complying with payroll reporting laws
  • making regular payroll tax payments
  • exposing owners to personal liability (including jail time) for lack of compliance with a variety of employment-related laws
  • in massachusetts, complying with data protection laws and establishing written information security plans
  • the list goes on
the trap

once aware of the extent of the additional overhead triggered by hiring an employee, many owners panic. they need the help, but figure it will cost more to hire somebody than what they get in return. so they throw caution to the wind and decide to hire the help they need as "independent contractors."

though businesses everywhere need to carefully consider this choice, it's especially important for business owners in massachusetts. several years ago our state enacted strict legislation that now presumes every person a business hires is an employee unless ::

  • the individual is free from the hiring company's control and direction in the performance of their services (both in contract and in fact)
  • the service is outside the usual course of the business of the hiring company (in other words, the service must be incidental to the business of the employer and not a necessary part of it)
  • the individual is regularly engaged in an independently established trade, occupation, profession or business for which he / she was hired to perform

if the person hired doesn't meet each one of these 3 criteria, the hiring company will be guilty of "misclassification" once it then violates one or more laws identified in the statute (which it inevitably must). these include wage and hour laws; minimum wage and overtime laws; law requiring the maintenance of accurate payroll records, failure to withholding and deposit payroll taxes, and failure to provide worker’s compensation insurance, among others.

why it's a problem

people who own all or part of a business, and sometimes those who simply serve in a management capacity, ultimately bear personal responsibility for assuring a company's compliance with various laws. ignorance of the law or of the actions of others is no excuse.

authorities can, have and and will impose substantial civil and criminal penalties who disregard their responsibilities in this arena. moreover, in many situations the contractors / employees are also empowered to file their own lawsuits to recover treble damages, attorneys’ fees and costs.

and lest you're breathing a sigh of relief right now because your business is not in massachusetts, you're far from off the hook. in fact, this recent inc magazine article reflects just how fraught employment law can be for everyone.

the solution

the dilemma owners face when hiring their first employee is very real. it's often true that hiring an employee will actually cost more than the value they can bring to the table. there are potential solutions, however, that will serve you better in the end than simply saying "damn the torpedoes, full steam ahead!"

  • identify all aspects of the work you want handled. identify significant portions that can legitimately be described as outside your "usual course of business." focus only on these activities when framing your search, and ultimately hiring, a true independent contractor
  • carefully choose your words in every communications about your search. you neither want to exercise control or direction in how the work gets done nor do you want to communicate about the role in a way that's subject to a different interpretation
  • it goes without saying that you better have a solid contract in place when you make that hire... for your own good, don't just use a generic agreement found on the internet. yes, they're free, and you get exactly what you pay for.

so if you're a ZENLegal client, here's our reminder :: engage your attorney in this process. it doesn't cost extra, and with his or her assistance you can more comfortably forge a path to getting what you need without putting yourself at undue risk.

and if you're not a ZENLegal client... well, why not?

jack speranza is an attorney, small business owner and principal of main street ventures. for 15 years he has helped his companies and his clients strike the right balance between risk and reward by weaving good business, good technology and good law into new services and operations.

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