Caution: Your Commission Agreements May Violate the Wage Act

By Erica E. Flores

In Massachusetts, the Wage Act requires employers to pay all earned wages, including commissions, on the day the employee is discharged.  Companies who have employees who work on commission have frequently relied upon the language of their commission agreements to relieve them of the obligation to pay some commissions at the time of termination.  However, a recent decision from the Massachusetts Appeals Court may prevent employers from relying on those agreements.

In 2008, Hampden Engineering Corporation (“Hampden”) hired Matt Perry as a Regional Sales Manager.  Perry’s compensation included a $45,000 salary, plus a one-percent commission on all sales in his region, payable at the end of the calendar year.  Hampden modified its commission structure in 2010, creating a tiered commission structure: one percent on all sales up to $2 million, two percent on all sales above $2 million, and three percent on all sales above $3 million.  In 2011, Hampden revised their commission structure yet again, eliminating all commissions on the first $1 million in sales.  Hampden presented the new commission structure to Perry, but he refused to sign.  As a result, Hampden terminated Perry’s employment and paid him in full for all accrued salary and vacation time.  Hampden did not, however, pay Perry his commissions for sales he had completed during the first three months of 2011, because their commission structure specified that commissions were paid at the end of the calendar year and that the employee must still be employed on the date of payment.

Perry filed suit, alleging that Hampden violated the Wage Act by failing to pay him commissions he had “earned” prior to his termination.  The lower court found in Perry’s favor and ordered Hampden to pay him treble damages plus interest, attorneys’ fees, and costs.  Hampden appealed that decision to the Massachusetts Appeals Court.

Wage Act may be superior to employer commission policies

On appeal, Hampden conceded that Perry was its employee, and that the Wage Act would apply to any commissions he earned if the amount had been “definitely determined” and was “due and payable” when Perry was terminated.  However, Hampden argued that Perry’s requested commissions did not meet that standard, and therefore, were not “earned” at the time of his termination.

First, Hampden argued that the commissions were not “definitely determined” because Perry had not agreed to the 2011 commission payment structure.  The Appeals Court rejected this argument, noting that Hampden and Perry had stipulated the amount of commission payments to which he would have been entitled if he had been employed at the end of 2011.

Next, Hampden argued that the commissions were not “due and payable” when Perry was terminated because its commission structure only paid commissions at the end of the calendar year, and only if the employee was still employed by the company at that time.  The Appeals Court rejected this argument as well, concluding that the plain language of the Wage Act foreclosed such an argument.  As the court pointed out, Section 148 of Chapter 149 specifically requires employers to pay earned commissions that are “due and payable” in full on the day of discharge, and expressly states that an employee may not exempt himself from that requirement, even by an agreement with his employer.

Significantly, the Appeals Court also determined that a commission must be treated as “due and payable” at termination even if it is not yet “due and payable” under the employer’s commission agreements or policies.  In other words, the court concluded that Section 148 mandates that all earned commissions be paid at termination, even if they would not otherwise be “due and payable” under the employer’s own compensation arrangements.

Takeaways

The Perry decision is notable not only for its holding but also for its brevity, and perhaps this decision is an outlier:  Other court decisions have held that commissions are not considered “due and payable” if there are unmet contingencies that would prevent their payment, and we don’t have all the facts upon which the trial court ruled in Perry’s favor.  However, if you are planning to terminate an employee who is eligible for commissions, you might consider whether to pay any commissions that could be definitely determined as of the date of the termination, even if your policy would perhaps support an argument that they are not “due.”  Hampden was required to pay Perry treble damages and attorneys’ fees based on this decision, and it would have been cheaper to pay him the commissions that he had “earned” in the first three months of the year.  Check with your labor and employment counsel to be sure your decision regarding pay for commissions is defensible.

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