Avoid Common Mistakes in Creating and Implementing Commission and Bonus Plans

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When employers create commission and bonus plans, they sometimes focus myopically upon the amount of commission or bonus to be paid if certain goals are achieved, neglecting to give due consideration to other critical elements of their plans. When employees are later disappointed not to earn as much as they had expected from the plan, they frequently file lawsuits or claims with the Labor Commissioner, alleging that the company has failed to pay compensation owed to them pursuant to the commission or bonus plan. In many cases, such claims are the result of a poorly-conceived plan and can be avoided through careful consideration and drafting as the plan is created. 

One of the essential questions to be answered in connection with any commission or bonus plan concerns the event which triggers accrual of the commission or bonus. Does the employee earn a commission upon procurement of a purchase order, for example, or is the commission earned only upon achievement of some later milestone, such as shipment of the product or receipt of payment from the customer? Many commission plans also fail to identify the base upon which commissions are calculated—gross sales revenue, gross profit or net profit? Even more commonly, many commission plans do not address the effect of a cancelled or returned order upon the salesperson’s right to a commission. Each of these deficiencies is a potential—and common—source of controversy. Commission and bonus plans should eliminate potential sources of confusion and controversy by defining the employee’s right to a bonus or commission as precisely as possible, eliminating ambiguity and addressing foreseeable bumps in the road such as a customer’s failure to pay.

Payment of an employee’s final wages also poses challenges when compensation includes commissions or bonuses. If the employer terminates the employment relationship, the employee’s final wages are due and payable on the date on which the employment relationship ends. If the employee resigns and provides more than 72 hours advance notice of the effective date of his or her resignation, final wages are also due and payable on the date of termination. If the employee resigns and provides less than 72 hours advance notice of the effective date of his resignation, however, his or her final wages are due within 72 hours.

To the extent that commissions have been accrued and are subject to calculation at the time of termination, they are payable at that time together with other wages. Note that the relevant distinction is between commissions which are subject to calculation and those which are not, rather than those which have been calculated and those which have not been calculated but can be calculated with available information. Employers are obligated to pay commissions at termination if they can be calculated at that time; the employer’s failure to complete calculations with available information does not excuse it from payment at that time.

Companies that have not submitted their commission and bonus plans to review by counsel in the past two years would be wise to do so. If you have any questions about the issues arising from commission plans or bonuses, or any other issue relating to employment law, please contact one of our attorneys:

Daniel F. Pyne III
Richard M. Noack
Ernest M. Malaspina
Karen Reinhold
Erik P. Khoobyarian
Shirley Jackson