For many workers, commissions are a significant part of their compensation, and for many employers, paying some or all of an employee’s compensation through commissions is an effective tool for keeping costs tied to revenue and giving employees incentive to grow sales and grow your business. The most common example are sales representatives, who are frequently paid some combination of base salary or draw and commissions; other service-related employees who are not involved in direct sales often have some portion of their compensation tied to revenue generated by the services they provide.
It is important for both employers and employees to remember that the Massachusetts Wage Act (the statute requiring timely payment of wages) expressly applies to commissions, which must be paid pursuant to the Wage Act requirements once they are earned. When the commissions are earned and how much is due to the employee are important questions, questions that are not as straightforward to answer as they would be for an hourly or salaried employee.
When are commissions earned: if there is a written commission plan that spells out when an employee has “earned” a commission, the terms of that plan will generally control. For example, a plan might specific that a sales representative earns her commission when the customer signs a contract or places an order, when the customer is invoiced, or when the customer actually pays. If there is no written commission plan, courts will generally assume that a commission is earned when a contract is signed or an order placed.
How much is due to the commissioned employee: employers often draft commission plans to include offsets for certain expenses in the calculation of the final commission due. Can they do this? The answer is not entirely clear, but a recent Massachusetts Superior Court decision suggests that employers should use caution, and employees paid on a commission basis should be watchful and review their commission plans carefully to be sure that there are no inappropriate deductions.
The Wage Act has been interpreted to prohibit deductions from the wages of hourly or salaried employees unless they are a valid set-off under Massachusetts law. This means an employer may deduct from an hourly or salaried employee things like medical and dental insurance premiums, taxes, and court approved garnishments, but cannot deduct expenses associated with your work.
It has been less clear how the prohibition against deductions applies to deductions from commissions. It is not an uncommon practice for employers to include certain costs in the calculation of commissions, many of which are really a way of transferring the employer’s overhead expenses.
For example, a commission formula for a salesperson may include deductions for expenses associated with the sale.
The Wage Act explicitly includes commissions within its scope, and states that it is applicable: “…when the amount of such commissions, less allowable or authorized deductions, has been definitely determined and has become due…” M.G.L. ch. 149, § 148. Until recently, there has been no guidance in the Massachusetts case law about the meaning of “allowable or authorized deductions" as it relates to employees compensated on a commission basis.
We represented a hair stylist whose compensation was based on a percentage of the revenue from the clients she serviced. The salon applied a “product deduction” of $2.00 for each client serviced, purportedly to cover the cost of the shampoo, conditioner, or other product used, which was deducted after the calculation of the commission. The crux of our argument was that an employer should not be able to do to a commissioned employee what it cannot do to an hourly or salaried employee- namely, to transfer a portion of the employer’s overhead expense to the employee.
The salon moved for summary judgment, arguing that the deduction was an integral part of the commission calculation, and that it was therefore an “allowable or authorized deduction.” In an opinion dated July 7, 2014, the Massachusetts Superior Court denied the salon’s motion. The court noted a prior decision of the Massachusetts Supreme Judicial Court, which “emphasized that deductions which further an employer’s interests, including the transfer of overhead costs to employees, are impermissible, as running strongly against the legislative policy which underlies the Massachusetts Wage Act."
That case settled before trial, therefore the decision has not been reviewed by an appeals court and is not binding on other courts in other cases. If followed by other courts in Massachusetts, however, the implications of this decision could be significant, and affect the rights not only of hair stylists whose pay is affected by “product deductions”(a common practice in that industry), but also other employees paid pursuant to complex commissions formulas that may similarly involve an impermissible transfer of the employer’s costs. If a deduction is not permitted, the deduction is likely a violation of the Wage Act, which requires that the employee be awarded three times the amount of the wages withheld, along with reimbursement for reasonable attorneys' fees incurred in enforcing the Wage Act.
For employees paid on a commission basis, this means you should review your commission formula carefully so you understand if your employer is incorporating any deductions that might be suspect under the law.
Employers, too, should carefully review their commission policies. It is risky, at best, to include offsets in the commission formula for direct costs of sales. A safer practice is to incorporate those costs as you would any other overhead expense in the amount you offer to pay your commission-based employees. For example, if you have direct costs associated with sales that are on average 1% of the sale, and you pay your employees 10% of the sales revenue, it is a better practice to set their commission percentage at 9%, rather than offer 10% and deduct the 1% cost from their commission calculation.
If you are uncertain whether your commission plan includes potentially unlawful deductions, or if your plan is unclear about when a commission is “earned,” it is worth your while to consult with an experienced Massachusetts employment lawyer.