March 15, 2018, Vol. 1
by Marc Campsen
Commissions – When Are They Legally Earned?
Many employers pay employees, at least in part, by commission in positions ranging from sales clerks to sales executives. Disputes as to how much, if any, of a commission is owed to an employee often arise when the employee leaves employment before the commission is paid. In this scenario, an employer’s exposure depends on whether the employee earns the commission prior to leaving. Understanding when a commission is earned is crucial to protecting employers from harsh wage violation penalties under Maryland and federal law that can total up to three times the commission owed and require the employer to pay the legal fees of the employee.“Understanding when a commission is earned is crucial to protecting employers from harsh wage violation penalties”
In Maryland, an employer is obligated to pay commissions to an employee upon the employee completing all work required to earn the commission. This obligation is not eliminated if the employee leaves employment prior to payment of the earned commission voluntarily, e.g., resigns, or involuntarily, e.g., termination or death. For example, if an employee completes a sale entitling the employee to a commission upon execution of the sales contract, but the employer calculates and pays commissions only at the beginning of the following month, the employee is nonetheless entitled to the commission even if the employee leaves employment during the month the commission is earned – prior to the employer calculating and paying the previous month’s commissions.
Importantly, employment contract language attempting to require the employee to remain with the employer until the time of payment of an earned commission to avoid the scenario in the previous example is unenforceable. In other words, an employer cannot escape its obligation to pay an earned commission if the employee leaves employment prior to payment simply by including a requirement in an employment contract that an employee must be employed by the employer at the time the employer makes payment of the commission.
Of course, this discussion begs the question – “when does an employee earn a commission?” Generally, once an employee has finally performed all obligations to become entitled to the commission – meaning there are no further work responsibilities to be completed – it is earned. Although this varies in every case, examples are instructive.
A sales executive whose commission is contingent only on obtaining an executed sales contract and the employer receiving payment on the contract – but not servicing the contract after execution/payment – has earned the commission once the contract is signed and the contract price is paid. By contrast, a loan officer that is required not only to generate loan customers, but also to service those loans after execution of the contract will not be entitled to a commission simply by obtaining a signed loan agreement.
Recently, I represented an employee that entered into a commission agreement with an employer entitling the employee to a certain percentage of all revenue collected by the employer on contracts the employee obtained. Subsequently, the employee obtained several contracts for the employer that resulted in the employer receiving millions of dollars in contract payments over a several year period. The employee did not earn his commission upon the execution of the contracts but, rather, once the contract payments were received by the employer because that was the juncture at which all work to “earn” the commissions was complete.
Unfortunately, the employer refused to pay the commissions after the employee left the employer for another job. I represented the employee in a three day trial that resulted in a judgment against the employer for the full amount of commissions that were owed – including those commissions arising from contract payments collected by the employer after the employee left employment – and ultimately recovered a six figure payment from the employer to satisfy the judgment. For more information on employer obligations and employee rights under commission agreements, please feel free to contact me.
About The Author:
Marc A. Campsen is an attorney at Wright, Constable & Skeen, LLP, where he focuses his practice primarily on litigating employment and business law matters. He is recognized as a Maryland Super Lawyer.
Read Marc’s bio | email | phone: 410-659-1343
DISCLAIMER: The materials available on this blog are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to your particular issue or problem.