Is your sales representative commission policy ready for an employee departure?
Article by Tom King
Many companies have employees that are, either in whole or in part, paid via commission. Many times, those commissions are paid based upon a percentage of the gross sales amount for each sale that the employee obtains on behalf of the company. Small companies often don’t have a written sales commission agreement. If they do, they are limited to the amount of the commission and how it is calculated. If your company either does not have a sales commission agreement or has one that focuses solely on the amount of the commission payable, you are not ready for a commissioned employee who either resigns or is terminated. Not only should your sales commission agreement clearly identify whether or not it is a “customer procurement agreement” or a “sales procurement agreement,” it should also outline when and how sales commissions become due and are paid, how post-termination commissions are calculated and for what duration they will be paid.
Sales commissions in Michigan are governed by a statute which requires that all commissions be paid when the commission becomes due. The commission due date is determined by one of the following: the contract between the employer and the sales representative, past practices of the parties, or if there are no past practices or written agreement by custom and usage prevalent in the business in which the parties are engaged. In the event that sales commissions are not paid within 45 days after the date of termination of an employee (or, if due later, within 45 days after the due date), an employer risks being liable for actual damages caused by the failure to pay the commission when due. If the employer has intentionally failed to pay the amount of the commission when due, the employer can, in addition, be liable for an amount equal to 2 times the amount of the commissions due or $100,000, whichever is less. As a result, the failure to properly and timely pay commissions when due, can be an expensive proposition for companies with commissioned employees.
In addition, in the absence of a written agreement outlining the specific sales on which commissions are due, Michigan applies the “procuring cause doctrine” to determine whether a commission is due. With regard to an employee who has either voluntarily left the company or has been terminated, this could result in the employee receiving commissions for a significant period of time after his or her departure for regular orders placed by customers, and/or multi-year contracts which the sales representative procured. In fact, without an agreement, it is very possible that a sales representative who has left the company will be entitled to future sales commissions related to sales contract signed with a company at a time when the sales representative was the sales agent for that company. If there are change orders in that contract which are not deemed to be a new transaction but simply reflect changes in the existing project and/or cost overruns, the sales representative may be entitled to future commissions on those sales as well.
Needless to say, it is better for both the sales representative and the company when the exact parameters of the sales representative’s right to commissions be outlined in a written agreement. The agreement should set forth not only the sales commission (how it is calculated and when it is to be paid), but also clearly distinguish between customer procurement and sales procurement. It should also outline the amount and duration of any sales commissions that will be paid in the event that the sales representative leaves the company.
If you do not have such an agreement in place with each of your sales representatives, lack of clarity as to the commissions owed and their payment will likely cost significantly more than you planned on when a sales representative leaves your company. Working with a professional to prepare a sales commission agreement is well worth the cost.