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.

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