A Guide to Sales Commission Issues

Overview

As an attorney who has had may sales commission cases and lawsuits, I can tell you that some issues pop up over and over again in commission cases. Employment in sales differs little from industry to industry as far as the law is concerned. Below are some issues that seem to recur.

Is Payment Mandatory or Discretionary?

Many people call my office to discuss their "commission" problems when they're not talking about a commission but rather a discretionary payment. Under California law, commissions are compensation paid based on the value of the employee's sale of a good or service, such as 1% of the total value of the sale. As one California case states, commissions are compensation "paid to any person for services rendered in the sale of such employer's property or services and based proportionately upon the amount of value thereof."

Similarly, there are compensation plans that reward employees based on certain standards of employee performance. For example, in the mortgage industry, some compensation plans reward employees for types of loans and the number of loans in a specific period. Under California case law, they are not technically commissions, but payment is mandatory.

In these examples, the employer promised to pay the employee if the employee can make the sale or fulfill the agreed upon conditions. The promise may be in a written contract, a compensation plan given to the employee, or even just a spoken agreement. Once the parties make the agreement made and the employee fulfills the appropriate condition, the employer must pay the commission. On the other hand, discretionary bonuses cannot be enforced in court. The classic examples are Christmas bonuses and year-end bonuses. In these circumstances, the employer has made no promise to the employees and has no criteria for setting these bonuses. Rather, the employer assesses the employee's performance after the work has been performed and makes the decision of if and how to compensate the employee. Simply put, if there is no mandatory obligation to pay the commission, then the commission cannot be enforced in court. Of course, it is the lawyer's role to look for that obligation in the company's papers and the circumstances of the case.


What is the Party's Agreement?

Commission cases often involve disputes about the parties' agreement. For example, commissioned employees often are hired on the basis of "on-target earnings" with a detailed commission plan to be determined later. When the plan comes out, the provisions may be different from the parties' earlier agreement. Another example is when an employer changes the commission agreement during employment. Did the employers violate California law in these situations?

The following concepts in California contract law influence a great many cases:

  • An employer cannot rewrite the terms of the commission agreement once the sale or performance has been made. I have seen employers make changes to commission plan retroactive -- even after sales have been made. Generally, the courts will not abide this.
  • When an employer reserves the power to make periodic changes to its commission plans, there are limits on its power: an employer cannot use its discretion to deny the employee the benefits of the commissions contract.

    If a contract can be reasonably interpreted to avoid forfeiture of an earned commission, a court is obligated to interpret it that way. This often arises when the commissions contract requires current employment for payment of a commission. I have used this principle in many cases.
  • Courts place a lot more emphasis on the written terms of a contract than what many clients expect. Some people feel that the written terms are "fine print" that don't matter. All the terms of a written agreement are considered.

Can the Court Strike an Unfair Clause?

Under California law, in some situations, a Court will make a determination that a clause in a commissions contract cannot be enforced, and the Court will "strike it" from a commissions contract. In California law, this is called the doctrine of "unconscionability." I have seen unconscionability claims arise when the commission plan requires an employee's current employment as a condition for payment of an earned commission.

Under this doctrine, the employer must somehow force the offensive commissions clause on the employee by either surprise or requiring the noxious term on a "take-it-or-leave-it" basis. Moreover, the court must find that the term "shock the conscience" or is commercially unreasonable.

In California, this is a cutting edge area of law. Some states, such as Texas, will enforce any contract no matter the circumstances of making the contract. The doctrine of unconscionability is difficult and emphasizes the need for a qualified lawyer for in a commission case.


Can the Case be a Class Action?

Commission cases under California law can be class actions and this is a huge help for some of my clients. These clients have small claims for commissions. Unfortunately, lawsuits are economic enterprises, and a small case may not justify hiring an attorney for a big lawsuit. However, these clients can get justice if his or her claim can be aggregated with others in a class-action lawsuit.

Under many States' laws, commission cases are ripe for class-action status, i. e., the clients have small claims, many employees have labored under the same commission plan and have suffered the same injustice. For more information on class actions, read the other articles on this website.

All the articles about the law have disclaimers and here is mine: there are many nuances in the law about commissions and contracts that are not addressed in this brief article. This article is intended to provide general information about this area in may not provide information that is specific to your case. The law on commissions varies from state to state. In all cases, I suggest getting legal advice from a qualified lawyer, such as myself.

If you need experienced representation by an employment lawyer who will fight passionately for your rights, please contact Mr. Kaufman at 866-278-2385 or Email Here.