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When is a Sales Commission Legally Earned?

 Not all businesses rely on in-house workers for their business needs. Many use sales representatives who go to customer sites and sell products on commission. Sales commissions may be the seller's only pay, or they may receive a base salary and receive their commission as a bonus or incentive pay. The employment contract determines the compensation plan between the sales rep and the employer.

When are sales representatives legally paid their commissions? At what point is the employer required to pay their worker for sales made in the field? Legal disputes often arise about the payment of commissions when a salesperson leaves the company, whether voluntarily or not.

Small business owners depend on their top performers to meet and exceed sales quotas, and those salespeople deserve to receive their fair pay. This article discusses sales commissions, how they are set, and when to pay them.

The Sales Commission Plan

A sales commission is an amount of money paid to a sales rep based on the number of sales made in the pay period. The commission may be in addition to their base pay, or their salary may be entirely commissions. A business's needs and sales team determine the sales commission structure.

The employment contract describes employee compensation. This way, there is no ambiguity about the amount and timing of commission payments. There are no federal or state laws requiring commissions. Each state has its own laws about the timing of commission payments. Employers should consult an employment attorney when setting up their sales compensation plan.

Some factors which will affect the earning and payment of commissions include, but are not limited to, the following:

State Laws

Most states have laws requiring the payment of commissions. For instance, California requires employers to pay commissions when earned (California Labor Code 2751). Salespeople must receive a written copy of the commission contract separate from any other employment contract.

There are no federal laws regarding the payment of commissions following termination of employment. Some state laws require employers to pay commissions within 30 or 45 days after termination.

Some states, such as Arizona, exempt real estate brokers from sales commission laws. These sales fall under a different set of legal codes.

Commission Structure

If a business has a sales team, the business may use a tiered commission structure. This is common in auto dealerships or other businesses where a sales force competes for customers. Tiered structures rate each salesperson by sales performance and then rank the performance.

Other companies use a sales incentive structure based on total sales per month or pay period. Employers divide the total number of sales by the number of team members, and that figure becomes the commission for the period.

Any method should provide a balance between teamwork and awarding personal high performance. Individual sales remain the foundation of a commission-based company.

The Employment Contract

If a case comes down to litigation, the contract controls unless state law has language to the contrary. A contract should spell out the employee's total compensation package. This includes:

  • Base salary or pay: The per-hour or per-month rate is the employee's salary. The commission rate should be included, and whether or not payroll taxes will be applied to commissions.
  • Commission compensation strategy: This should explain the percentage of sales, sales goals, benchmarks, audits, and metrics used in assessing commissions. Unless state law requires specific payments, such as in California, the contract should state when and how the employee will receive their commission.
  • Benefits: Possible employee benefits, including life insurance, health insurance, pension, and stock options, should be part of the contract as well.

Express provisions in your employment contract help avoid legal action over types of compensation later. If your salesperson expects variable pay because commissions are contingent on the customer's payments, they are less likely to argue about minor delays in payment.

Additional Factors

In 2002, the Maryland Court of Appeals overruled a lower court's decision and held that a provision in a salesperson's contract was invalid. In Medex v. McCabe, a provision of the employment contract required workers to be employed with the company to receive commissions. McCabe had left the company before a customer paid for a sale. The appellate court held that state law required employers to pay wages "when due," which in this case was upon termination.

Employers must consider the difference between a sales commission, which is part of the employee's pay, and an incentive bonus, which helps employee retention. For instance, promising to double a commission if the employee stays until a certain date is an incentive. They are still entitled to the commission if they leave before that date.

A smart business owner's pay structure should allow for unusual circumstances and quirks in company culture. Bad weather, natural disasters, and supply-chain disruptions can all impact your bottom line without fault to your sales team.

Courts are more likely to side with salespeople who did not receive commissions because of factors beyond their control. Your safest course is flexibility when paying commissions in these circumstances.

Get Legal Help With Your Sales Commission Policies

If a business owner has a commission dispute with a current or former employee, you may need a lawyer to help guide you through a lawsuit. Contact a local employment law attorney today and avoid costly mistakes.

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