A sales commission is earned legally when an employee meets the necessary conditions put down by the employer.
The conditions can include
- Raising of an invoice by the customer,
- Money received for the sale,
- The customer signs a sales closure document
- Delivery of goods/services, etc.
A company can decide on the conditions, and it can be one or more.
However, the rules governing when these commissions are legally earned can be complex.
In this article, we’ll discuss when is sales commission legally earned while shedding light on compliance requirements and commissions owed on termination of employees.
Key Legal Principles That Affect Commission Payout
Adherence to key legal principles is crucial in determining when sales commissions are legally earned.
These principles help ensure that commissions are earned fairly and transparently.
1. Completion of sales
The definition of a completed sale plays a pivotal role in commission agreements.
That’s why it is crucial to establish clear criteria for what constitutes a completed sale, as this definition can vary between industries and organizations.
- Contract signed
- Payment received
- Transfer of ownership (real-estate)
- Delivery of goods/services
- Invoicing
- Escrow closure (escrow service confirms)
- Cooling-off or probation period expired
Completion of sale can also be combines with threshold requirements. They are conditions that must be met before commissions are considered earned.
These conditions can include:
- Achieving minimum sales targets.
- Meeting sales performance quotas.
2. The parties’ understanding
In case the written contract is incomplete, unclear, or otherwise subject to interpretation, the next factor is what is referred to as the parties’ understanding.
This points to the ongoing communication between the employer and employee during the period of employment relating to the payment of commissions.
For example, the company may have told the employee that commission would only be paid after the client has cleared the invoice. Or that the company policy is to pay a commission upon signing a sales agreement.
These aspects become more forceful when they have been communicated in writing.
3. Statutory timing
Statutory timing for commission payments involves legal guidelines dictating when employees must receive their earned commissions. These regulations can differ by jurisdiction (read below).
Commissions should be paid within a specified timeframe as per the law. It can be settled with the full and final settlement after termination or be processed with the next pay cycle (follow which ever is the shorter time period).
In all the factors above, written documents and electronic records are paramount. In case of legal disputes, they are valuable elements in arriving at a decision.
Commissions owed on termination state laws chart
State laws are crucial in determining how commissions are classified and when they must be paid to terminated employees. Here's a chart on commission on termination:
| State | Time Limit to Pay Commissions |
|---|---|
| Alabama | Within 30 working days after termination if there is no written agreement. |
| Arkansas | Within 30 working days after termination if there is no written agreement. |
| Arizona | All commissions earned and unpaid through the time of termination are due within 30 days of termination. Commissions due for all orders placed but delivered after termination. |
| California | As specified in a written contract. |
| Colorado | As specified in a written contract. |
| Connecticut | By the date specified in the written contract or 30 days after termination, whichever is later. |
| Florida | Within 30 days after termination of the contract. |
| Georgia | Within 14 days if there is no written contract; within the time frame of the agreement if there is a written contract. |
| Illinois | Within 13 days of termination or 13 days when commissions are earned. |
| Indiana | Within 14 days after payment would have been due under the contract. |
| Iowa | Within 30 days after commissions earned. Upon termination, within 30 days after termination. |
| Kansas | Within 30 days after commissions are earned. |
| Kentucky | Within 30 days after the effective date of termination. |
| Louisiana | As specified in the written agreement. If there is no written contract, all commissions due must be paid no later than thirty working days after termination. |
| Maine | Within 30 days of the effective date of termination. |
| Maryland | Within 45 days after payment would have been due if the contract had not been terminated. |
| Massachusetts | Within seven days after termination or expiration of the agreement; or within 14 days for goods shipped after termination or expiration of the agreement. |
| Michigan | When due by contract or within 45 days after termination. |
| Minnesota | Within three working days of the salesperson’s last day of work. |
| Mississippi | Within 21 days after the effective date of termination. |
| Missouri | When the contract is terminated, within 14 days for all commissions presently due and within 14 days after the date of termination when due. |
| Nebraska | On all orders delivered and all orders on file with the employer at the time of termination of employment less any orders returned or canceled at the time suit is filed. |
| New Hampshire | All commissions must be paid within 45 calendar days of termination. |
| New Jersey | Commissions earned and due are payable within seven days of termination. All other commissions must be paid within 30 days after payment would have been due if the contract had not been terminated. |
| New York | Within five business days after termination or when the commission is earned. |
| North Carolina | All commissions due must be paid within 30 days of the effective date of termination. All commissions that become due after the effective date of termination must be paid within 14 days after they become due. |
| Ohio | Must be specified in written contract. If there is no written contract, the usual and customary practice between principals and reps shall prevail. Upon termination, all commissions due must be paid within 13 days or within 13 days after they become due. |
| Oklahoma | Within 14 days of termination plus commissions due after termination must be paid within 14 days of the date on which they become due. |
| Oregon | Within 14 days after the effective date of termination. |
| Pennsylvania | On termination within 14 days after payment would have been due if the contract had not been terminated. Goods ordered prior to termination but shipped after termination within 14 days after payment would have been due. |
| Puerto Rico | Immediate upon termination for just cause. If termination is for other than just cause, payment amounts in terms are to be determined in accordance with the referenced statute. |
| South Carolina | As required by contract or upon termination if there is no written contract. |
| Tennessee | Within 14 days of the salesperson’s termination. |
| Texas | Must be specified in written contract. If there is no written contract, all commissions due shall be paid within 30 working days after termination date. |
| Virginia | As specified in the written agreement, but must be paid within 30 days from termination. |
| Washington | When normally due under contract if written or reasonable and customary if a verbal agreement, but no later than 30 days after the manufacturer is paid. Upon termination, all commissions due plus those earned but not due, must be paid within 30 days of termination. |
Certain states, like California, classify commissions as a form of wages.
For instance, California’s Labor Code states that wages, including commissions, must be given within a certain amount of time after earning them.
If an employee is terminated and the employment contract does not explicitly state that commissions are forfeited upon termination, they may be entitled to receive earned but unpaid commissions.
The contract terms will determine whether any earned but unpaid commissions must still be paid.
Maryland, have laws that invalidate or render void certain employment agreements under specific circumstances.
In the case of Medex v. McCabe, the Maryland Court of Appeals held that a provision in an employment contract requiring a salesperson to remain employed with the company to earn commissions was invalid and against public policy.
Procuring cause doctrine in commissions
The procuring cause doctrine is a legal principle to determine who is entitled to receive a commission in cases where multiple agents or brokers are involved. It means understanding who was the "procuring cause" of the sale even if they were not directly involved in the final stages of the transaction.
If an employee's efforts were the primary reason for a sale after their termination, they may be entitled to commissions, even if the contract does not mention post-termination commissions.
This was the result of the landmark case of Perthuis v. Baylor Miraca Genetics Laboratories.
What are the Laws Regarding Commissions?
A combination of federal and state laws governs the issue of sales commissions. These have to be weighed in the context of contractual agreements between the employer and employee.
The various laws and regulations related to sales commissions include:
1. Fair Labor Standards Act (FLSA)
The federal Fair Labor Standards Act (FLSA) relates to minimum wage, overtime pay, recordkeeping, and child labor standards. The FLSA also requires employers to pay employees for all hours worked, including commissions.
2. State laws
Many states have their own laws to do with sales commissions.
Some require that employers have written commission agreements with their employees. For others, commissions can be paid within a specific time frame after the sale.
3. Antitrust laws
Antitrust laws relate to competitive price fixing and/or allocating markets. These include agreements among employers to fix sales commissions.
4. Employee Retirement Income Security Act (ERISA)
The Employee Retirement Income Security Act (ERISA) regulates employee benefit plans, including retirement plans. Employers can use commissions for retirement plans but must comply with requirements regarding funding and administration.
In Conclusion
Understanding when sales commissions are legally earned can be complex. It involves various factors like employment contracts, laws, and industry standards.
Here are some important takeaways to remember:
- Put it in writing: Always have commission agreements in writing. Specify the commission rate, calculation method, and payment schedule.
- Know your commission type: Determine the type of commission – whether fixed, sliding scale, one-time, or spread over time.
- Check company policies: Review internal company rules and employee handbooks for commission-related policies.
- Maintain records: Keep records of past and current commission payouts. Salespeople should also retain documents related to commissions.
- Seek legal advice: If disputes arise, consult an attorney familiar with your industry and local laws to ensure compliance with regulations.
By following these guidelines, you can navigate commission-related matters more effectively and ensure that commission agreements are fair and legally sound.
