Sales Commission Agreements Can Limit Potential Liability
A manufacturing company’s sales employee successfully convinces a new customer to purchase a commercial cooler. Under the employee’s sales commission plan, she receives a commission of 2% of the price of the cooler and any repair parts purchased. The employee also receives a 2% commission on the annual service plan the customer purchases to maintain its new cooler. At the end of the year, the employee quits. The customer continues to purchase the annual service plan.
Does the former employee have a valid claim for continuing commissions for future repair parts and service plans the customer purchases?
In many states, the answer is yes — the former employee arguably could have a claim to continuing commissions, even if the employee quit or is no longer employed by the company. Employers without agreements that clearly address this type of scenario therefore risk potential exposure of millions of dollars. When employers do not have a written agreement with their sales employees, or when the agreements do not detail how commissions will be handled if the employee is terminated, sales employees could argue they are entitled to commissions for sales they “procured” for the employer, even after they quit or are no longer working for the company.
A number of states, including Michigan, Illinois, Pennsylvania, Minnesota and others, recognize the “procuring cause doctrine” if a commission agreement is silent as to post-termination commissions. Under the procuring cause doctrine, a sales representative earns commissions on a sale finalized after his or her termination as long as the employee originally “procured” the sale. This means that a sales representative potentially could recover commissions for all parts and services purchased by the customer into perpetuity or for the life of a program. Plaintiffs’ lawyers could sue under various state laws that apply when sales representatives are not timely paid commissions due. These laws often provide for damages, penalties, and attorneys’ fees if the employee can show that the commissions were earned, but not paid.
But the procuring cause doctrine does not apply when there is a clear written agreement that details when commissions are earned and what happens after the sales representative quits or is terminated. Some states, such as California, actually require written commission agreements for employees who are compensated on a commission basis. Thus, a carefully drafted agreement could effectively limit a former employee’s claim to post-termination commissions.
It is critical that the agreement specify:
- How the commission will be computed (e.g. based on total revenue contracted)
- When the commission is earned (e.g., after payment from the customer)
- When the commission is to be paid
- Whether the commission will be paid post-termination of employment
- How and when the commission plan can be changed
- Whether a commission will be paid if the purchaser defaults or returns the merchandise
Review your commission policies and agreements and consider consulting with experienced employment counsel in order to prevent your company from being on the hook for commission payments long after a salesperson has left.