Clearly Written Agreements are the “Ounce” of Prevention

Commissions payable to former employees present a special set of issues for California business.  The importance of actions to prevent disputes increases over 2012 as the state will require all employee commission agreements to be in writing by December 31. See, “Employee Commissions”

California requires that all earned compensation must be paid at least twice per month. An employer also must usually pay a worker all earned compensation immediately upon termination or be subject to penalty for each day of delay up to a 30 day maximum.  However, an employee may not have earned a sales commission at termination if, for instance, the company requires the customer’s actual payment of funds before commission on those funds is owing.  The employer must pay such a commission earned after termination immediately upon the receipt of the funds.

Determination of just when a commission is “earned” can become quite contentious at or following termination unless there is a clear written guideline.  What of the commission for a particular account a salesperson was instrumental in securing but which did not actually close until shortly after that employee has departed the company?  Is a commission earned when the customer agrees to do business, makes an order, pays for an order, or receives and is satisfied with the order?

The answer can legitimately be any of these, depending on the scope of the salesperson’s responsibilities to ensure completion of the transaction.  However, that proper “earning point” could be anyone’s guess if there is no written standard.  It also could be a litigation nightmare if a salesperson leaves employment before the employer considers one or more commissions have been earned and the stakes are high enough.

Actions that can reduce the potential for such post-termination disputes include:

● Unambiguous contract terms with each salesperson establishing the worker’s responsibilities for a successful complete transaction and a corresponding point in that transaction when the commission is earned and payable; and

● Where possible, forthright and constructive communication between management and the salesperson at termination to confirm or reach specific written resolution on the latter’s rights to commissions on pending transactions.

Skilled legal counsel can almost certainly help anticipate and deal with the grey areas on commission rules before any problems actually arise.

For more information, see the DLSE’s FAQ on Paydays, Pay Periods and the Final Wages.