For many professionals, particularly in sales and similar commission-based roles, commissions are a critical part of their compensation. These earnings often represent a significant percentage of their income, making the issue of whether commissions can be withheld upon resignation a matter of concern. This article explores the legalities and nuances surrounding this question, shedding light on employee rights and employer obligations.
Understanding Commission-Based Compensation
Commission-based pay is a structure where an employee earns a percentage of sales or revenue they generate. While some workers rely solely on commissions, others receive a combination of base salary and commissions. Industries such as real estate, sales, and marketing frequently utilize this payment structure to incentivize performance.
Unlike fixed wages, commissions are often subject to payment delays. For instance, an employee may earn a commission after closing a deal, but the actual payout may occur weeks, months, or even years later, depending on the terms outlined in their contract. This delayed timeline raises unique concerns when employees leave their positions, as the question of whether they are still entitled to pending commissions often arises.
General Legal Principles Governing Commissions
What Constitutes Earned Commissions?
Commissions are generally considered “earned” when the employee fulfils the conditions stipulated in their contract. These conditions might include completing a sale, delivering a product, or ensuring customer satisfaction.
Once commissions are earned, they are typically classified as wages under many state laws.
Employer’s Obligation to Pay Earned Wages
Most U.S. states have laws mandating that employers pay all earned wages, including commissions, after an employee leaves.
For example, in Oregon, employers must pay all earned wages immediately upon termination or resignation. Failure to do so can result in penalties, including attorney fees and additional compensation.
Conditional Commissions
Employers may impose conditions on commissions, such as requiring the employee to remain employed at the time of payment. However, these conditions must comply with state and federal wage laws. If the conditions are unreasonable or not explicitly outlined in the contract, they may not be enforceable.
Retroactive Reductions Are Prohibited
Once a commission is earned, employers cannot retroactively reduce or withhold it, even if the employee quits or is terminated.
Can an Employer Withhold Commissions If You Quit?
The answer to this question largely depends on three factors:
State Laws
Wage and labor laws differ across states. For instance, in Pennsylvania, the Pennsylvania Wage Payment and Collection Law requires employers to pay all earned wages, including commissions, by the next regular payday after an employee’s departure. If wages are withheld for over 30 days, employees may claim additional damages of 25% of the total amount owed or $500, whichever is greater.
In contrast, other states may have stricter or more lenient requirements.
Employment Contracts
The terms of your employment contract, offer letter, or employee handbook are critical in determining whether commissions can be withheld.
Contracts often include clauses specifying when commissions are considered “earned” and whether continued employment is a condition for payment.
Disputes Over Amounts Owed
If there’s a disagreement between you and your employer over the amount owed, the employer may provide partial payment while disputing the remainder. However, this does not absolve them from eventually paying the full amount if proven to be owed.
Key Legal Protections for Employees
- Classification of Commissions as Wages: Many states, such as Oregon and Pennsylvania, classify commissions as wages under their labor laws. This classification extends wage protections to commissions, ensuring that employers cannot withhold them without just cause.
- Timely Payment Requirements: Employers must pay all earned wages, including commissions, promptly after an employee’s departure. This typically means by the next scheduled payday.
- Penalties for Non-Payment: Employers who unlawfully withhold commissions may face significant penalties. These can include statutory damages, attorney fees, and additional compensation to the affected employee.
- Employment Contracts Must Align with State Laws: While contracts may outline specific conditions for earning commissions, they cannot override state wage laws. Any clause that contradicts state laws is generally unenforceable.
Steps to Take If Your Employer Withholds Commissions
If you believe your employer is unlawfully withholding commissions, consider the following steps:
- Review Your Employment Contract: Carefully examine your employment contract, compensation plan, and any other relevant documents. Look for clauses that address commission payments, including conditions for earning and receiving commissions.
- Gather Documentation: Retain all relevant records, including emails, offer letters, employee handbooks, and communications with your employer about commissions. Documentation strengthens your case if legal action becomes necessary.
- Understand Your State’s Laws: Familiarize yourself with wage and labor laws in your state to understand your rights and your employer’s obligations.
- Communicate with Your Employer: If commissions are withheld, ask your employer for an explanation in writing. This creates a record of the dispute and clarifies their position.
- Seek Legal Assistance: Consult an employment lawyer to evaluate your case. An attorney can determine whether your employer’s actions are lawful and guide you through the process of recovering unpaid commissions.
Practical Tips to Protect Your Commissions
- Clarify Terms Before Accepting a Job: Ensure that your employment contract or offer letter clearly defines how commissions are earned and when they will be paid.
- Retain Copies of All Relevant Documents: Keep copies of your employment contract, employee handbook, compensation plan, and any communication about commissions.
- Track Your Performance: Maintain records of your sales, deals, or other activities that generate commissions. This provides evidence of the work you performed to earn commissions.
- Be Proactive When Leaving a Job: Before resigning, ensure that you’ve fulfilled all conditions required to earn pending commissions. Document the status of any pending deals or sales.
Common Employer Defenses and How to Counter Them
Employers may attempt to justify withholding commissions using various defenses. Understanding these arguments can help you prepare a stronger case:
- “You Didn’t Meet the Conditions for Earning the Commission”: Counter: Provide evidence that you fulfilled all contractual conditions for earning the commission.
- “The Commission Is Not Yet Due”: Counter: Review the payment schedule outlined in your contract and compare it to your work timeline.
- “The Sale Wasn’t Finalized”: Counter: Demonstrate that the sale was completed, and you met all conditions for earning the commission.
- “You Agreed to Forfeit Commissions Upon Leaving”: Counter: Verify whether such a clause exists in your contract. If it does, check if it aligns with state wage laws. In many cases, such clauses may be unenforceable.
Conclusion
In most cases, an employer cannot withhold earned commissions when you quit. However, understanding your rights and the conditions outlined in your employment contract is crucial to ensuring you receive the compensation you’ve earned. If you suspect your employer is unlawfully withholding commissions, take immediate action by reviewing your contract, gathering documentation, and consulting a knowledgeable employment attorney. By taking these steps, you can protect your rights and recover what you’re owed.