You’ll be Damned if you Don’t Draft a Commissions Agreement That Protects Your Company from Paying Triple Damages and Attorneys’ Fees.

Posted: October 13, 2011 in Wages, Overtime, Commissions and Pay Issues

Your commission policy or agreement will be construed against your company, and it could cost you a fortune. Commissions and similar earned bonuses are initially a matter of contract in Massachusetts. However, once commissions are earned in Massachusetts, they become the equivalent of ordinary wages. This is important because the failure to pay wages that are due and payable can result in a lawsuit to recover automatic triple damages and attorneys’ fees and costs of collection.

There is a very pro-employee statute allowing such recovery. A $100,000 thousand dollar commission claim can easily turn into a $500,000 liability when one considers that interest accrues at 12% per year, $100,000 turns into $300,000, and the employer ends up paying the legal fees and costs on both sides. I’ve litigating these issues on both sides, and it seems that juries are inclined to believe that employers play games with commissions, so you will have an uphill battle in court unless your commission policy is rock solid.

You need to be very clear on how a commission is earned and on what sales it is earned, and how it is calculated. Ambiguous commission agreements are frequent subjects of lawsuits. The majority of employers do not seem to be good at drafting a commission agreement. For the reasons above, this can be big trouble. They may think that they know what it means, but a plaintiff’s lawyer can probably poke holes in it.

You want to be very clear on how a commission can be earned, and how it is calculated. You don’t want two employees claiming the right to the same commission. You may not want an employee earning commissions well beyond your expectations because of an overlooked aspect of the commission plan.

You also want to guard against having to pay commissions that come due long after an employee has left, and perhaps is even working for a competitor. This requires careful thought and wording of the agreement. One option is to make commissions wholly discretionary (you would want to call it a “bonus,” but the word “bonus” by itself is not enough). This is preferable to company, but may be unacceptable to employee.

Generally, you want to be sure that commissions are paid on actual numbers, after the company is paid and the profit is calculated. In no event should a company be in the business of paying commissions on expected earnings, because those earnings may never come to fruition. There may be an exception of paying a reduced amount to a departing employee, but this has to be carefully planned. You also have to be careful to not terminate an employee solely because commissions are about to become due, or you will be liable under a theory known as breach of the covenant of good faith and fair dealing.

If your commission agreements need a tune up, or you are facing a claim from present or former employees, give me a call. We cannot change commissions that have already been earned, but most commission plans can be changed at any time by the employer.

By Adam P. Whitney, 617.338.7000.

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  1. […] Adam Whitney of Damned if You Do; Damned if You Don’t writes “You’ll be damned if you don’t draft a commissions agreement that protects your company f…s” […]

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