When is a Sales Commission Legally Earned?
It is not uncommon for sales representatives who experience transition in their careers, either voluntarily or otherwise, to close sales while in the company's employ but not get compensated for their successes. Whether compensation is purposely or unintentionally withheld by the company, the effect is the same. A legal dispute will arise as to the sales person's right to earn the commission.
So what if a sales representative closes a sale, but the customer doesn't send in payment until after the sales person has left the company? In other words, when does a sales representative, in the legal sense, earn the commission? Unfortunately, there is no single answer.
Many factors such as a particular state's law, the written contract and other communication can all influence the earning's timing. There are certain universal guidelines that federal and state courts will look to in deciding the timing issue, however. Sales representatives should be familiar with them in order to prepare themselves well in advance of any dispute, thereby providing them a serious edge in any future litigation.
The Employment Contract
When sales representative are hired, the initial employment contract, coupled with an incentive or commission schedule, will usually describe the obligations of both the company and the sales representative. A company may argue that it was understood that sales were earned only when the customer sent in payment. The problem with that defense is employment agreements don’t always say that.
Let’s assume that the contract states that the sales manager was to be paid 1 percent of sales. The contract would have to expressly state that commission earnings were contingent upon the customer sending in payment.
The Parties' Understanding
In the absence of express provisions in the employment agreement, the Courts will consider communications between the company and the sales person over the course of their dealing throughout the sales representative's employment at the company.
For example, in response to a sales person's inquiry about a commission due, the company may respond that the particular customer never sent in payment for the goods and, as such, it cannot yet make payment to the sales person. If that response goes unchallenged, the Courts may look at that as an admission by the sales person of the company policy.
The parties' understanding as to the timing of earned commissions can also surface when the sales person is negotiating a severance agreement, which will typically provide for the payment of "earned commissions."
Certain states, such as Maryland, invalidate employment agreements in which the earnings of sales commissions are predicated by factors beyond the sales person's control. In Medex v. McCabe, the Maryland Court of Appeals held that a provision in a contract requiring the sales person to remain in the company's employ to earn his commissions was invalid, against public policy and an anathema to Maryland's Labor & Employment Articles 3-501 through 3-507, which permit a sales representative to recover up to three times the amount of the unpaid sales commission and attorney fees.
Other cases brought in Maryland using this principle compelled one Maryland Federal District court to analyze the legitimacy of certain company requirements for the payment of commissions based upon whether the requirements are arbitrary or within the control of the sales person. The Court's attitude was favorable to the sales person if such sales representative completed all of his duties to secure the commission and an arbitrary event out of the sales rep's control occurred after the sales person's termination from the company.
The Contract Has the Last Word
Sales people, upon anticipating separation from their current company, should immediately secure a copy of any document signed upon being hired. This will inevitably include employment agreements, and possibly supplements.
Additionally, he or she should secure copies of employment handbooks and any written communications that may impact each party's understanding of when commissions are earned. It's best to have those reviewed by an employment lawyer before separation. Don't sign any release or separation package before receiving legal advice as to the unpaid sales commission issues.
Get a Free Initial Case Review
If you are a business owner involved in a commission dispute with a current or former employee a lawyer's help may be necessary to resolve the issue. They'll know the law and be able to guide you through a lawsuit, should one arise. Contact a local attorney for a free initial case review to discuss your problems and how they can help you move toward a positive resolution.