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Attorneys

Word to the Wise: Commission Paid Employees

March 17 2017

By Charles L. Post

For several years, California law has required that whenever an employer hires an employee and “the contemplated method of payment of the employee involves commissions … the contract shall be in writing and shall set forth the method by which the commission shall be computed and paid.

Let me rant a bit. I will say it again. Any written commission agreement must simply and clearly express the terms of the commission. It is a long established rule in California that ambiguities in employer drafted documents will be construed against the employer and in favor of the employee. Chuck-Post-07_web

Because commission plans can serve as an effective means of incentivizing employees to succeed, employers have become expert at creating specific incentives for the specific behaviors. For example, Joe works for XYZ Company. He is great at selling XYZ’s low profit margin products but the company wants to create an incentive for Joe to upsell XYZ’s more profitable products. So, it drills down and creates a commission plan that increases Joe’s earnings if: (1) the company is paid for the order within 10 days of delivery; and (2) provides increasingly higher commissions on a sliding scale based on the size of the employer’s profit. Also included are means for refunds and deductions based upon return of goods or client utilization of post-sale services from XYZ. The employer also makes clear that no commission is earned until payment is received and that the commissions are only due and payable when funds are received while the employee is still employed by the company.

A first draft of the commission plan reflecting all these details can look like a physics equation or something written in Sanskrit. The fact that you or your employee understands the commission arrangement at the time it is written is less important than it probably should be. A commission plan is a contract and the terms of that contract will be construed and understood by a later court by the same rules as any other contract. If any word or phrase can be interpreted in two legitimate way, the interpretation more favorable to the employee will almost certainly be used. This can be an expensive lesson to learn.

Takeaways?

  • Ensure all commission plans are in writing, signed by the worker.
  • Use clarifying examples to demonstrate how particular abstract terms within a commission plan will actually be applied.
  • Expressly state when the commission is “earned” and when earned commissions shall be paid. Clearly state when commissions top accruing or being earned (upon termination of employment, for example).
  • Have the commission arrangement reviewed by strangers to your business. If you find yourself defending the instrument in court, neither the judge nor jury is likely to be experienced with the way your business operates.