How do companies define commissions and disputes in contracts in employment law? Employees who receive a salary or hourly rate compensation on a W-2 have fairly straightforward compensation arrangements with their employer. Disputes rarely arise in this type of arrangement outside of overtime claims or claims of unfairly or illegally “docking” paychecks for various reasons.
Very often, however, disputes do arise when companies seek to pay commissions, blended-commissions, shares or percentages of profits/fees, piece rates, or other similar schemes. These types of arrangements can come with many pitfalls. To avoid disputes, companies and workers must have a clear understanding of the arrangement and agree on the details and definitions involved. Also, they must take great care to properly classify the status of the worker as an employee or independent contractor for tax purposes. It is very helpful to have a written agreement or policy which clearly spells out the terms, definitions and practices which govern the relationship.
Many companies want to give an incentive to certain employees to work hard to produce by offering to pay them on a commissions basis or give cash incentives when they reach certain production or efficiency goals or targets. This can be a great “win/win” Costly disputes can arise when the company and the worker have differing expectations concerning how these arrangements will play out.
When the company and the employee do not share the same expectations of how the commission or bonus will be calculated, costly disputes arise. Both parties should have the same answers to the following questions:
- Which sales are covered by the agreement?
- How are the commissions calculated?
- What expenses are included as “overheard”?
- Does the percentage change, and if so, when?
- Can the company unilaterally change the structure?
- What happens if more than two sales people are involved?
- Are there “house accounts” which “don’t count” for commission purposes?
- What does the salesperson have to do to earn a commission?
- Does it matter where the customer is located?
- When will the commission or bonus be paid?
- Will the commission or bonus be paid if the sales person is no longer working for the company?
There are many more possible issues. Suffice it to say that when a company does not pay a commission or bonus as the worker expects, a claim can arise. How the commission or bonus plan is explained and documented is very important. When a claim arises, it can rise and fall on the documents which pass between the parties.
For example, Sandy Seller is a commission-only salesperson for an insurance agency. She worked hard for several months to open a large account. When it came time to pay her commission, the insurance company paid her less than half of the commission she expected. The company said that she was not listed as “the opener” on the account because another agent had called on the company the year before and it was outside her territory. He company had no written policy on how an opener is defined and her territory was only verbally described to her as all of the Memphis area. The customer’s main office is in West Memphis, Arkansas but it has branches in the city of Memphis and other places.
Sandy will have an excellent claim for the difference between the commission she expected and the one the company paid, but it could b a long and costly lawsuit for both parties. Both sides would have been better served by agreeing on the front end under what circumstances this kind of commission would be paid.
Salespeople are not the only ones who have these types of arrangements. Managers and directors are sometimes compensated on the basis of the production or efficiency of their branches, stores, or departments. Claims arise when payment does not meet expectations.
A department manager complained that every year he “just misses” certain targets to qualify for a larger bonus. Each year he asked to see the accounting backup on the bonus calculation so he could evaluate his own performance and improve the next year. Each year the company provided “very thin” documentation. He began to suspect that the system was stacked against him. He brought a case for unpaid bonuses and fraud and proved that the company changed the criteria each year to avoid paying his and other employees’ bonuses. Such cases can result in very large recoveries. It is important to establish and understand the ground rules of these types of compensation plans from the beginning and take steps to verify that they are being administered fairly.
Tips to Avoid Disputes Over Commission or Bonus Plans:
- Insist on transparency. At every opportunity insist that all accounting and transactions be transparent to all parties. If everyone can see the numbers as they come in, it helps verify accuracy. The time to discuss a problem or question is before the final numbers are on the table.
- Head off issues early. Confront misunderstandings or important issues while they are still hypothetical. People change when money is on the table.
- Be fair. See the other side of every issue and try to be fair and reasonable. In the long run, this makes for better relationships.
- Define terms. Insist that terms are as precise as you can make them. If geographic territory is important, set out specific counties, cities, and states which are important. Avoid general terms like West Tennessee, Southeastern United States, or major cities unless you go on to define them. For example, the sales territory shall consist of all the states in the Southeastern United States: Tennessee, Mississippi, Georgia, Alabama, and South Carolina.
- Put the agreement or policy in writing.