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Clearing Up Commission and Bonus Confusion for Employers

When an employee departs a company, either voluntarily or involuntarily, an employer needs to know if they are legally required to pay commissions and bonuses to the departing employee. Failure to pay can result in obligations to pay the owed wages plus double that amount as a penalty! This article explores these issues.

When employees work on a commission basis, employers may be responsible for paying a former employee commissions where payment has not been fulfilled by the date of their termination. In Indiana, commissions are considered “wages” under Indiana’s wage statutes, and when an employee voluntarily or involuntarily leaves the employer, the employee could seek payment of these amounts. Very importantly, the employer may owe the commission payment plus double that amount as a penalty, plus any attorneys fees or costs the former employee may incur while seeking the commission payment!

Commissions are earned when an order is accepted unless there is a clear, written agreement to the contrary. In order to ensure that the employer, and not the former employee, receives commission payments after the employee’s termination, a written agreement upon the employee’s hire is crucial. Upon hire, the employer should provide the employee a detailed explanation of the commission structure so there is no question what percentages the employee will be paid and when the employee will receive the commissions. Most importantly, the employer needs to define what will happen if the employee voluntarily or involuntarily leaves employment.

For example, an employee sells machine tools to a company on October 1st, but the tools will not be delivered and payment will not be made until November 1st. On October 15th, the employee quits. Under this scenario, the employee would be entitled to the commission made from the sale on October 1st, even though he is no longer employed by the company. This payment is regulated by Indiana’s Wage Payment statute, which governs voluntarily terminated employees. Indiana’s Wage Claims statute governs involuntarily terminated employees, but the result is the same under both statutes – payment of the commission must be made timely to the former employee. Obviously, an employer would want to keep the commission from this sale instead of paying the amount to a former employee, but does so at some risk if the commission policy is not clear.

Therefore, upon hire, the detailed commission explanation should state that any employee who is voluntarily or involuntarily terminated will not receive any commission payments if payment has not been received by the employer by the date of the employee’s termination. The detailed commission explanation should also include a statement that the employee read, understood, and agreed with the commission structure, commission percentages, and the inability to receive commission payments after involuntary or voluntary termination. This statement should be followed by a signature line for the employee’s signature. These steps will protect an employer from losing commission payments to a former employee.

Similarly, employers should also review their bonus programs to see if a former employee is entitled to a bonus upon voluntary or involuntary termination. A bonus is a wage if it is compensation for time worked and is not linked to a contingency such as the financial success of the company. If, however, the bonus is dependent on other factors than the employee’s efforts, it is not considered a wage, and the employer does not need to pay the former employee the bonus.

For example, a manufacturer has an employee who works on a piece-rate basis and is paid by dividing the total weekly earnings by the total number of hours worked that week. If that employee works over forty (40) hours per week, the employee is entitled to an additional one-half times the regular rate for each hour over 40 (forty), plus the full piecework earnings. If that employee also earns a bonus every time they complete a certain number of goods, the employee would be entitled to their regular wages, overtime pay, and a piece-rate bonus (if the goal was met) on the next usual and regular payday. In this situation, a piece rate bonus is tied solely to the employee’s efforts and is considered a wage that must be paid upon departure from the company.

To conclude, employers need to review their commission and bonus structures to ensure proper classification as a wage or non-wage. Please let us know if you need us to review your policies.

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