In an earlier post regarding payroll deductions, I promised to write about the unique aspects of deductions from a sales employee’s commissions. This topic is always ripe for discussion. Why? Well, good salespersons will make great commissions! They are winners. They don’t like to lose sales – or money. They are usually very aware of what they have sold and the related commission. Accordingly, when they see a deduction on a commission, or a commission less than they expected, naturally their radar goes on high alert. I can’t blame them, this is their bread and butter after all – and this is what drives them; these are folks generally highly motivated by monetary compensation – which is the whole point. They bring in revenue for the business and want to be rewarded accordingly.
There are actually two different aspects to salespersons commissions – with an extremely important distinction between the two. First, when can an employer deduct from commissions owed, due to errors or omissions? Second, when can an employer reduce a salesperson’s commission not due to the salesperson’s errors or omissions? Hopefully I can help clarify. However, for purposes of this post, I should specify that this is all about employed salespersons – not independent contractors. Commission salespersons who are independent contractors have their own prompt payment statute and that would throw us off track here.
Making Deductions From Commissions Due to Errors or Omissions
As I mentioned before, Minnesota law (Minn. Stat. 181.79) treats sales commissions differently when it comes to allowing wage deductions. Indeed, the wage deduction requirements for faulty workmanship, loss, theft, or damages do not apply when an employer has rules related to commissioned salespeople, when the rules are used “for purposes of discipline, by fine or otherwise, in cases where errors or omissions in performing their duties exist”. In English, this means that an employer can deduct a salesperson’s commissions pursuant to a policy that sets forth that commissions may be reduced by way of deduction, when the salesperson screws up.
For example, a salesperson inputs into the system a sale of 100 widgets. The order goes out and the salesperson gets paid her commission on those widgets at the next payroll. A month later, 90 widgets are returned because the customer, who just got around to opening the boxes, only ordered 10 widgets – not 100. The salesperson’s typo of adding a “0” was in error and thus, so long as the employer has a policy stating that a deduction may be made, it can make that deduction. Another example, a salesperson delays inputting a sale for a week, delaying the shipment. A deduction in his or her commission may be made as a way to discipline the salesperson.
While there is no requirement that the employer’s “rules” be in writing, it certainly would be best practices to have it in writing that commissions are only earned on accurate sales (or something to that effect) and may be reduced for the salespersons’ errors or omissions. It does not hurt to provide examples in the policy as well – then the intent is clear and everyone is on the same page. A good salesperson wouldn’t expect to earn something for nothing, so communication about deductions is key.
Don’t Confuse Deductions With Adjustments & Defined “Earned”!
Here’s where employers can get into trouble. I know you remember from my earlier post that an employer cannot deduct an employee’s wages earned for “lost or stolen property, damage to property, or to recover any other claimed indebtedness” unless, after the loss, the employee voluntarily agrees to the deduction in writing. The exception above still applies. Yet, what happens when an salesperson is terminated (for whatever reason)? There is often a perceived expectation by the salesperson that he or she will receive all the commissions earned up to their last day worked. This is where the biggest of disputes arise, especially if the salesperson has a big commission check coming (had she or he remained employed). You need to be clear whether those commissions were indeed earned.
The key in whether – and what – commission is owed is almost completely dependent upon one word that is hopefully in your commission plan:
The answer lies with when the commissions are “earned”. Because, recall that you must pay employees all wages earned pursuant to the Minnesota Payment of Wages Act (Minn. Stat. 181.13-.14). I cannot stress the importance of having a well drafted incentive policy or sales commissions policy, or whatever you want to call it. That policy should have some key items in it (don’t forget your at-will language!), so that it is clear when the commissions are “earned” wages (which an employer then cannot deduct from). The word “deduction” should be avoided when adjusting commissions for monies paid but not earned, so as not to create confusion.
For example, the policy should be clear that the employee is only entitled to commissions on actual sales. If a product is damaged, returned, refunded, etc. until X days after the sale, it is not actually sold, thus no commissions are “earned” and nothing is “due” to the employee. Simply, nothing was sold, nothing is earned. The policy should be clear that commissions are not earned until that invoice has been closed out (or some other measurable event) – and that adjustments may be made until a certain period of time. Thus, to recover the over-payment (the commission on the now unsold goods), the future commissions are adjusted accordingly (reducing the next commission payment). Essentially, employers often are paying advance commissions each month and then adjusting those advancements thereafter.
However, once the triggering event has been met – which should be spelled out in the policy (i.e. 45 days after receipt of the sale and after the period of time for returns), the commissions are “earned”. At that point, employers should only deduct for the reasons above (errors or omissions by the salesperson). Thus, sales commission policies should be very clear, defined, and well thought out.
Finally, don’t forget that termination of employment itself can be a triggering event. Thus, a policy may state that no commissions are earned after the employment is terminated, and the employee must be employed at the time of a payout in order to earn the commissions. Not all employers will do this, however. In the case of paying terminated employees for commissions earned while employed, caution should be had concerning the employee’s right to demand payment of commissions (and wages) within 24 hours of termination – as rarely does an employer know the amount of commissions due so quickly.
In short, this is one time when semantics are extremely important. Deductions from commissions should only occur due to an employee’s errors or omissions, and adjustments should only occur in commissions that are not yet earned. No deductions or adjustments should be made to earned commissions without the employee’s voluntary agreement in writing after the fact. Your winner may not feel as though she or he is losing something if the expectations and rules are clear on these distinguishing points.