Does Your Company Have Commission Contracts With Sales Staff?

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By:  Claudia D. Orr 

 

 

There isn’t a new court decision to discuss, but I recently read of another large settlement ($1.25 million) that had to be paid to a sales person who had not been paid all amounts due at time of termination and thought I should provide some cautionary pointers.

First, there is a state law that provides a cause of action to a sales representative (either an employee or independent contract) whose principal task is to solicit orders for “goods” (as opposed to services).  MCL 600.2916. This law provides that “[a]ll commissions that are due at the time of termination of a contract between a sales representative and principal shall be paid within 45 days after the date of termination. Commissions that become due after the termination date shall be paid within 45 days after the date on which the commission becomes due.”

If all amounts are not timely paid, the principal is liable for the actual amount due plus two times the amount if the failure to pay was intentional (up to $100, 000).  Unless it is a simple math error, it is viewed as intentional even where there is a good faith dispute between the parties. The only good news for the principal is that the “prevailing party” (as opposed to the prevailing plaintiff) is entitled to their reasonable attorneys’ fees and costs.

One way to escape the sales representative’s act is to create a “bonus plan” instead of a sales commission plan.  Under the sales representative’s act, a sales commission is expressed as a percentage of orders, sales or profits.  A “bonus” falls under the Michigan Wages and Fringe Benefits Act as a fringe benefit (not wages).  This law provides that “[a]n employer shall pay fringe benefits to or on behalf of an employee in accordance with the terms set forth in the written contract or written policy.” MCL 408.473.  And, at termination, you have to comply with the terms of that written contract or policy.  MCL 408.474.  A bonus plan can be written with broad discretion built into it for payments at termination, as often is done with the payment of unused vacation time at termination.

Whether drafting a bonus plan or commission contract, certain events should be addressed.  For example, when is a sale made and who has the authority to accept it on behalf of the company?  At what point does the commission or bonus accrue (e.g., when the order is submitted, goods shipped, payment received, expiration of period for return of goods/refund, etc.)?  How long after the commission or bonus accrues is the payment to be made to the sales representative (e.g., two weeks, 30 days, end of each quarter, annually, etc.)?  Are there other conditions attached to the payment (e.g., are there offsets, does the sales person have to be employed when payment would be made, if the employee is no longer employed, must a release be signed, etc.)?

Careful drafting is required to avoid the “procuring cause doctrine” under Michigan’s common law which can result in a claim for commissions for the life of the part, or life of the account.  As a side note, most principals want their sales representatives to be bound by non-compete, non-solicitation agreements.  These, too, must be carefully drafted as well since an overly broad or improperly drafted agreement may not be enforceable (remember:  pigs get fat but hogs go to slaughter). Remember, drafting errors can be extremely expensive.  Always be sure to consult an experienced employment attorney, such as the author, before you enter into such agreements.

This article was written by Claudia D. Orr, who is Chair of the Legal Affairs Committee of Detroit SHRM, and an experienced labor/employment attorney at the Detroit office of Plunkett Cooney (a full service law firm and resource partner of Detroit SHRM).  She can be reached at corr@plunkettcooney.com or at (313) 983-4863.  http://www.plunkettcooney.com/people-105.html. 

Detroit SHRM encourages members to share these articles with others, inside and outside their organization, as long as its name and logo, and the author’s information, is included in the re-post of the article. January 2016.