An employer has general discretion to implement and modify the terms of a commission plan. (Refer to unpaid wages section) To be upheld, however, a commission plan should generally be clear and unambiguous and must clearly define when commissions are considered “earned.”
A frequent dispute between commissioned employees and their employers arises when an employee is either terminated or resigns. Whether an employee is entitled to commissions following his/her departure from employment is based, in part, upon the following factors: (1) The clarity of the terms of the commission plan, itself, (2) The definition of earned commission as included in the plan, (3) The amount of duties remaining, if any, which are necessary to complete the sale at the time the employee departs, (4) The custom and standard of the employer.
While an employee's entitlement to commissions requires a case-by-case legal analysis of the details and circumstances involved, the following general rules of thumb may be applicable:
- Employees who have resigned voluntarily before performing substantial duties necessary to complete the sale will generally not be entitled to recover commissions after departure (assuming a clearly defined commission plan exists);
- Employees who have been involuntarily terminated may be entitled to recover either a pro rata share of the commission and, in some cases, the full commission amount (depending on the manner in which “earned commissions” are defined in the plan);
- A vague and ambiguous commission plan which is drafted by the employer will generally be construed against the employer and in favor of the employee.
Time for Payment of Commissions
In most cases, the amount of commissions earned by and owed to the employee cannot be ascertained at the time of termination or resignation. Payment of commissions may, therefore, be made to a departing employee as soon as the amount owed can be reasonably ascertained — without penalties incurred against the employer.
If the time at which commissions could be reasonably ascertained by the employer has passed and commissions have still not been paid, the employer may be subject to Waiting Time Penalties, as well as, interest, and reimbursement of reasonable attorney's fees and costs. The employee will, of course, be entitled to the amount of the unpaid commissions, as well.