September 30, 2019
Most salespeople are compensated at least in part on commission. Some earn a salary in addition to sales commissions, and some are paid solely by commission. Either way, sales commissions are the “lifeblood” of a salesperson. If someone messes with the commissions of a salesperson, they are going to hear about it. It’s how they earn their living and feed their families.
But what happens if the employment relationship ends? Does a salesperson have any right to commissions after they leave or are terminated?
What does the contract say?
This can be a very complicated question. There are a variety of factors that courts will look at in determining whether or not post-termination commissions may be owed to a salesperson who has resigned or been terminated. First and foremost, courts will look at whether or not the parties had a contract that dictated how post-termination commissions were to be handled. Such a contract can exist in an explicit, written form, but it can also arise from the course of dealings between the parties, or by way of commission plans that are clearly communicated to salespeople during their employment.
What if there is no contract?
In the absence of a contract, courts will sometimes look at what is the custom in the industry in order to determine whether, and if so to what extent, post-termination commissions may be owed to a former salesperson.
Was the commission “earned” prior to separation?
Another important factor is the extent to which the commission was “earned” by the salesperson before termination. If the salesperson, prior to separation from employment, had already done everything required of him/her in order to receive the commission, but the payment of the commission just didn’t happen to come due until sometime after separation, courts are more likely to find that the employee is legally entitled to the commission. There is a saying that “the law abhors a forfeiture.” This means that the law does not like it when, through no fault of their own, someone is forced to “forfeit” money or property that they possess or have earned.
On the other hand, if a salesperson separated from employment when there was still work to be done for an account – for instance, if certain services were still needed from the salesperson after the sale had been made, and such services were not performed because the salesperson’s employment ended in the meantime – courts are less likely to find that the salesperson is legally entitled to the commission, since the commission arguably had not been fully “earned” at the time of separation.
Different treatment of employees versus independent contractors
It is also important to note that the treatment of sales commission issues are handled differently when the salesperson is an independent contractor, rather than an employee. Ohio, for instance, has a specific statute that addresses sales commissions earned by independent contractors. The statute is very favorable to the salesperson, in that it allows him or her to recover significant additional amounts beyond the unpaid commissions themselves. This statute does not apply, however, to employees.
Obviously, this is a very tricky and complex area of the law. Both companies and salespeople need to have knowledgeable legal counsel in their corner when facing issues involving disputed sales commissions.