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Jun 26, 2019

Q&A: Say what you mean in commission agreements

Wage and Hour 

Question: One of our salespeople landed two huge contracts. Under the terms of the commission agreement, this salesperson would earn nearly $3 million. But we never anticipated paying anyone that much money. We reserved the right to amend the plan. Can we cut the commission payment?

Answer: You do so at your peril. You promised certain payments if your sales team met specified goals. If this individual already put in the work to fully achieve those goals, then you are risking a lawsuit if you make a last-minute modification to your commission payout.

Words of Caution
In a recent California case, the company whittled down a star salesperson’s commission from $2,901,806 to $410,572, because it was “simply too much money to pay.” The employee sued, noting that a PowerPoint presentation stated that commissions would be uncapped. The company tried to dismiss his complaint because its written commission plan gave the company the right to modify or cancel the plan. A federal district judge mostly sided with the employee and allowed several claims to continue forward. The employee may now show that the company engaged in negligent misrepresentation and was unjustly enriched by its actions. The employee can also proceed with a claim that the company violated California Labor Code 2751 by failing to state in writing “the method by which the commissions shall be computed and paid.” This California state law requires most commission agreements to be in writing, with a signed copy of the contract given to affected employees, and a receipt obtained in return (Beard v. IBM Corp., ND Cal, April 2019).

A Thorough Commission Plan
When designing your commission plan, it’s critical to think through all of the implications. If one individual makes a massive sale but the company overall has lost money for the year, are you prepared to pay out the commission? If not, then your plan should include an adjustment based on overall profit margins. The flip side is that such steps may make it difficult to retain your best salespeople.

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This website presents general information in nontechnical language. This information is not legal advice. Before applying this information to a specific management decision, consult legal counsel.