The Massachusetts Wage Act: Payment of Commissions and Deductions from Commissions

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.

+slnlaw LLC  

The Price of a Job: Non-Compete Agreements in Massachusetts

On your first day at a new job, or if you are lucky maybe a day or two before, you are handed a stack of papers to sign. Many of these documents are standard forms; one of them, however, could significantly limit your opportunities if this job does not work out: the non-compete.

It is not exactly optional, or negotiable.  Sure, you can say no to the job, but chances are you have invested a lot of time and energy into getting the job offer, and that you have accepted it because it is a job you really want and/or need.

So, is your non-compete enforceable?  The answer is a resounding "maybe."  A non-compete agreement is enforceable in Massachusetts if it is: (i) supported by consideration; (ii) reasonable in time and geographic scope; and (iii) necessary to protect a legitimate interest of the employer.

"Consideration" means you have to get something of value in exchange for your promise not to compete.  A job offer counts, if you sign the non-compete at the time you accept employment. it is less clear whether there is adequate consideration if you are asked to sign the agreement after you are already working, and your employer does not offer you anything new (i.e., more compensation or a promotion)in exchange.

"Reasonable" is highly dependent on the facts and circumstances.  A restriction of as few as 10 miles could be considered unreasonable if the reach of the business is only 3-5 miles, while nationwide or even global restrictions might be upheld if the employee's territory was national or global in scope. Similarly, a two year restriction might be found acceptable in certain industries, while one year might be excessive in an industry with high employee turnover and mobility.

A "legitimate interest of the employer" does not include an interest in suppressing competition: your employer must be seeking to protect either trade secrets/confidential information or goodwill belonging to the employer. Typically, non-competes for employees in a technical environment are primarily concerned with confidential information, while non-competes for employees in a sales or marketing area are primarily concerned with the company's goodwill (its relationships with and reputation among customers and potential customers).

What does this mean for you? If you have the luxury of time, a relatively brief consultation with an experienced employment lawyer should provide you with some guidance as to what is and is not restricted and the likelihood that it will be enforced.  If you don't, here are some simple pointers:

First, because there are no bright lines in Massachusetts law regarding non-compete agreements, as a practical matter you should understand the very real risk that it will be enforceable before you sign it. Though it is hard to do when you are anxious to start a new job, if you really don't believe you can live with the restrictions if the job does not work out, or if you think you may only be there a short time, you might decide than another several months of job hunting is preferable to a two year restriction on your ability to work in your field.

Second, if that is not a practical option, either because you really need the job or because you work in a field where you will find non-compete agreements pretty much anywhere you go, pay careful attention not only to the length and scope of the agreement, but also to exactly what it says you can and cannot do.  Some agreements define "competition" very broadly; others are more careful to define what they consider competition.  Your employer may not be interested in negotiating the terms of the non-compete with you, but may be able to explain to you what they are really concerned about so you can evaluate your risk accordingly.  For example, a software company may have a broadly worded non-compete, but in actuality only be concerned about competition in the narrow space in which they operate.

Third, the way you handle your departure from the company has probably more impact on whether you will find yourself in a lawsuit than the document itself.   Most employers (of course, not all) are reasonable, and will only seek to interfere with what you do after leaving a job if they are concerned about some risk that they see as important.  The non-compete cases we have seen fall into three major buckets: (i) concern about confidential information; (ii) concern about customer relationships; and (iii) bad blood, justified or not, between the employer and the employee.

You can't control whether your employer is reasonable or not, but you can protect yourself by understanding that confidential information and customer relationships are very important to most employers, for lots of good reasons, and very innocent actions can raise their suspicions in that regard.  For example:

• You may work remotely, and need to email yourself documents and materials from time to time- if you make sure you discuss this with someone at your company, and ask for and follow any protocols or procedures the employer has for that kind of information transfer, you are far less likely to raise "red flags" on your departure if the employer searches your company email (yes, always know they can do this) and finds you have been sending arguably confidential information to yourself.

• When you are ready to resign, or if you are fired, resist the temptation to do a "data dump" of your contacts and other information.  It may feel like your own work product and/or your own digital rolodex- it may in fact be.  It will, however, immediately cause your employer to assume you are planning to use that information inappropriately.  If there is information you need, and believe is appropriate to take or copy, ask permission. The downside is the answer may be "no," but generally that is preferable to the expense, inconvenience, and risk of being sued.

Finally, relationships matter. This has been true in my experience with almost every sort of employment dispute.  Generally, people don't like lawsuits.  For everyone except the lawyers, they are time-consuming, distracting, and expensive.  For this reason, there are lots of things people could sue over and don't, usually because the parties have a relationship of respect, even when the employment ends.

The lack of clarity in the law of non-compete agreements in Massachusetts has been frustrating to both businesses and employees, and every so often legislation is proposed to define more clearly what is and is not a legitimate post-employment restriction.  To date, none of these bills have passed, however, leaving all parties with little guidance about how to proceed.  In the meantime, we hope the above information is helpful to you in charting a reasonable course through these waters.

+slnlaw LLC