...
Commission wages may be provided in addition to an hourly or a salary rate of pay. Such plans may also be an alternative to a salary or hourly rate. For example, compensation plans may include salary plus commission, or commission only.
In some instances, commission wages cannot be determined at the time of a sale and must be calculated based on later developments (e.g., receipt of payment, shipping of product, or delays to allow for customer returns). In that case, commission wages become due and payable when they are reasonably calculable. For instance, an employee might get a weekly salary, but commissions might be calculated and paid out monthly.
Bonuses are sometimes confused with commission wages. Bonuses are not based on the price of a product or service, but are usually based on reaching a minimum amount of sales (or similar criteria). Many times, a bonus is paid to individuals who are not engaged in sales at all.
Computation of commissions
Commission computation is based upon the contract or agreement between the employer and the employee. Computation frequently relies on such criteria as the date the goods are delivered to a customer, or the date payment is received. Sometimes, a commission is subject to reduction if the goods are returned. If these conditions are clearly specified in the contract or agreement, they may be used in computing the payment of the commissions.
Payment of commissions after employment ends
Generally, if the contract for commissions is clear and there are extra duties which must be performed to complete the sale, an employee who voluntarily quits without accomplishing those tasks is not entitled to a commission. In other cases, the obligation to pay the commission depends on when a commission has been “earned” by the employee. Commissions on “immediate” sales (such as retail sales) are usually simple. However, some sales are not “completed” until other factors have been satisfied (e.g., the sales agent may be required to perform additional services for the customer).
Where the termination is a discharge (involuntary separation) and the employee has been prevented from completing the contract terms, he or she might be able to recover all or part of the commissions. In some cases, an employee may attempt to recover a commission (perhaps by filing a wage claim) despite having failed to perform all of the conditions required to earn the commission.
For example, the employee might claim that the timing of a termination was intended to prevent him or her from collecting a large commission.
A commission is “earned” when all of the legal or contractual conditions have been met. Note that courts generally will not enforce unlawful or unconscionable terms and will interpret any ambiguities against the person who wrote the contract (usually the employer) and in favor of the employee.
The bottom line is that a commission becomes a part of wages owed (e.g., the commission is “earned”) once the conditions outlined in the contract have been satisfied. This may involve delays for various reasons, such as waiting for receipt of payment from the customer. However, once the contract conditions have been satisfied, the commission has been earned as must be paid as wages owed, even if the employee is no longer with the company. Employers cannot deny payout of earned commissions simply because the salesperson was no longer employed on the date of computation. From a legal standpoint, denying an earned commission would be no different than refusing to provide a final paycheck simply because the individual was no longer employed on the scheduled payday.
Bonus plans
Under certain circumstances, employers can deny payout of a bonus (not a commission) if the employee does not remain employed through the date of payout. Unlike a commission, a bonus is not necessarily “earned” but could simply be provided as a reward.
For example, if a bonus is paid under a certain set of defined conditions (such as meeting sales and profit goals) then those conditions can include a requirement to remain employed through the payout date. The distinction is that most bonus plans involve money promised to an employee in addition to the monthly salary, hourly wage, or commission rate usually due.
Courts have found that if a bonus plan does not expressly state that individuals must remain employed at the time of payout to be eligible, the employee might be able to file a claim and collect the bonus. However, if the requirement to remain employed through the payout date has been clearly stated as one of the criteria for eligibility, then payout can be denied (especially if the employee voluntarily quits or leaves the company).
There is some gray area if an employee is terminated or discharged. For example, if an employee is under a performance improvement plan, but fails to improve and is terminated, the bonus could be denied. However, if an employee is released without apparent cause, and the termination occurs shortly before the payout would be made, the employee might have a legal claim to the bonus. The reason is that common law holds that employees cannot be terminated specifically to deny a bonus to which the employee would otherwise be entitled. Note that “common law” is not an actual law, but is derived from court rulings on matters such as contract disputes.