Is Your Business Ready for the Departure of a Commission Based Employee?
Many businesses have employees and independent contractors who earn part or all of their compensation by way of commission. In many cases these commissions are paid based upon a percentage of the gross sales obtained by the employee.
All too often small businesses don’t have a written sales agreement, and if they do, they are limited to addressing only the amount of the commission and how it is calculated. Not only should a sales commission agreement clearly outline when and how sales commissions become due and are paid, it should also address how post-termination commissions are calculated and the duration of their payment.
Under Michigan Sales Representative Commission Act (SRCA), the due date of the payment of a commission is based on the terms written in the employment contract. If there is no contract or the contract doesn’t specify a due date, then the history of the parties will control or, alternatively, custom and usage prevalent in the business. For example, if Allie has consistently paid Bob within two weeks of a sale, then the due date will be two weeks after the sale under the statute. If the parties have no prior history, then the general custom in the industry will prevail.
Under the SRCA, in the event that a commissioned employee is terminated, commissions must be paid within 45 days of the date of termination or the due date, whichever is later. An employer that fails to timely pay runs the risk of being liable for actual damages. If an employer is found to have intentionally failed to pay, they may be additionally liable for two times the amount of the commissions or $100,000, whichever is less. Thus, an employee owed $10,000 commission could receive $20,000 on top of their original $10,000 for a total of a $30,000 judgment.
In addition, Michigan applies the “procuring cause doctrine” whereby an employee is entitled to recover his commission “whether or not he has personally concluded and completed the sale, it being sufficient if his efforts were the procuring cause of the sale.” Absent an agreement stating otherwise, under this doctrine, an employer runs the risk of potentially paying a former employee ongoing commissions for years after their departure, particularly in situations involving regular customers or ongoing multi-year contracts.
Needless to say, it is best for both your business and your employees to have a contract with the exact parameters of the sales representative’s rights to commissions. Such an agreement should not only address how and when commission are calculated and due, but also the amount and duration of commissions in the event that a sales representative leaves the business.
The above by no means covers all of the issues a business faces when it comes to sales commission agreements. If your business lacks clarity in its agreement or doesn’t have one altogether, experienced attorneys at Tishkoff PLC are available to provide advice and guidance, please call our office today. Toll Free: 1 (855) TISH-LAW.