Commission payments are one of the most common ways employers compensate employees for their work. At the same time, however, a failure to properly pay commissions is one of the most frequently litigated issues under the Massachusetts Wage Act, M.G.L. c.149, §148 (the "Wage Act"). The Wage Act requires employers to pay commissions when "the amount of such commissions, less allowable or authorized deductions, has been definitely determined and has become due and payable to such employee...."
Commission calculations and timing of payment are often prescribed in employer-published commission plans. Such plans typically address (i) how a commission is earned, and (ii) when the commission becomes due and payable. If the commission plans are not properly drafted and implemented, particularly with respect to commission payments following cessation of employment, employers can find themselves facing lawsuits that could result in awards to the plaintiff/former employee equal to three times the amount of the commission that was not properly paid, plus court costs and attorneys' fees. These enhanced monetary damages provide an enormous incentive for plaintiffs and their attorneys to file Wage Act claims.
Two recent Massachusetts cases from the Appeals Court and Federal District Court, respectively, are instructive regarding the pitfalls of failing to draft legally-compliant commission plans. In the first case, Perry v. Hampden Engineering Corporation, 90 Mass. App. Ct. 1109 (2016), an employer terminated an employee who was paid, in part, on a commission basis. Although the employer paid the employee the base salary he was owed, as well as his accrued, unused vacation pay, it refused to pay the employee $8,462.00 in commissions the employee claimed to have earned through his date of termination. The employer's refusal to pay the commission was based on its conclusion that those commissions were not yet due and payable because its commission policy stated that "an employee must be employed at the end of the calendar year in order to receive commissions earned the prior year."
The Appeals Court disagreed with the employer's argument and found that the employer's commission plan violated the Wage Act. In its analysis, the court analyzed whether, at the time of the employee's termination of employment, the employee's commissions had become definitely determined and due and payable. The court ultimately concluded that, because the parties had stipulated that the employee earned $8,462.00 in commissions through the date of his termination of employment, his commissions were "definitely determined." Accordingly, because the exact amount of the commissions was known at the time of the employee's termination of employment, the commission payment was, in fact, "due and payable." Thus, the court invalidated the commission plan requirement that the employee remain employed through the end of the year in order to be paid his final earned commissions. As required by law, the amount owed was trebled and the employee was awarded his attorneys' fees and court costs as well.
In the second case, Israel v. Voya Institutional Plan Services, LLC, 2017 WL 1026416 (D. Mass. 2017), the employer's commission plan stated that employees would be paid commissions in the payroll immediately following the third month after the month in which he or she performed the related services. The plan further provided that those employees who resigned from the company would "not be entitled to any prorated payment" of commissions following their resignation. In July 2014, the plaintiff/employee resigned from the company. At that time, the employee had earned $31,748.99 in commissions, but those amounts were not scheduled to be paid until a few months later pursuant to the company's policy. Because the employee had resigned, the employer determined, pursuant to the commission plan, that the employee was not entitled to any pro-rated payment of those commissions. The employee disagreed and sued the employer to recover his unpaid commissions. The court found in favor of the employee, concluding that his commissions were "definitely determined" and "due and payable" at the time he resigned. In so holding, the court reasoned that "Israel did the work to earn the commissions prior to his resignation, and the fact that it may have taken [the employer] a few months to make a final calculation as to the exact amount of the commissions is not sufficient to take them outside the scope of the Wage Act." Simply put, the employer's "withhold[ing] [of] the commissions that [the employee] earned during his final months of employment violated the Wage Act." The amount of commissions owed was trebled and the former employee was awarded $35,000.00 in attorneys' fees.
As illustrated by the foregoing cases, employers must pay an employee commissions that are definitely determined at the time of the employee's separation from employment because commission policies and plans that require employees to be actively employed on the date of payout violate the Wage Act. To the extent that employers have commission policies in place that include such language, those policies should be immediately revised and reissued to comply with the law.
If you would like assistance drafting and/or revising a commission plan, please contact any member of the Labor, Employment and Employee Benefits Group at Mirick O'Connell
This article is the first in a series of articles that are intended to highlight key issues under the Massachusetts Wage Act, M.G.L. c.149 §148. The next article will address how employee bonuses are treated under the Wage Act.
In this context, "definitely determined" means that the commissions are mathematically calculable.
The court first reasoned that the commissions were "definitely determined" because the parties agreed that the employee would have been paid the $31,748.99 had he remained employed.