3 Keys to Drafting Commission Plans to Avoid Wage Act Violations

As I mentioned in some of my prior posts, the Massachusetts Weekly Payment of Wages Act (“Wage Act”) poses many challenges to employers due, in part, to the vagueness of its terms, the strict liability it imposes on employers (and individuals having management of the company), and the threat of treble damages and attorneys’ fees.  One thing is clear, however: commissions are considered “wages” under the Wage Act if they are “definitely determinable” and have become “due and payable.”  While many in-house counsel and employers are aware of this, they mistakenly assume that their company can avoid violating the Wage Act if the company’s commission plan states that commissions are payable: (a) only if the employee is employed at the time the employer decides to pay them, or (b) only at the employer’s discretion.  As Prudential Insurance Company of America recently found out, however, simply including such a clause may not provide enough protection if the plan does not clearly address when commissions are “definitely determinable” and when they are “due and payable.”

Prudential had an elaborate nine-page document outlining its Regional Coordinators’ Sales Compensation Plan.  One of its long-time employees, Christopher McAleer, claimed that he was terminated from his employment and was owed commissions.  Prudential contended that, because the Compensation Plan granted Prudential complete discretion to interpret and calculate payments under the Compensation Plan, including determining whether McAleer was eligible for commissions, his commissions were not arithmetically determinable and, therefore, not “wages” under the Wage Act.  Judge Woodlock of the Federal District Court disagreed, however, noting that, while Prudential reserved discretion over many aspects of the commissions (even including the calculations of commissions and whether to withhold commission payments under the Plan from an employee it deemed was ineligible or who was terminated for cause), the commissions were “not themselves discretionary.”  In other words, Prudential did not have discretion to not award commissions at all.  (In fact, the Court noted that, had Prudential retained such broad discretion, the Plan would have been rendered meaningless.)

Prudential could have avoided its current predicament, and in-house counsel (and employers without in-house counsel) should keep the following three concepts in mind when reviewing their commission plans:

  1. The commission plan should be clear as to when any commission is “definitely determinable” (commonly referred to as “earned”).  Too often, the only focus in plans is on when commissions are payable.  Yet, since commissions are “due and payable” based on when they are “earned,” it is best to be explicit as to when a commission is “earned.”
  2. Once a commission is “earned” by the employee, the employer will likely be required to pay that amount, even if the employee is terminated or quits before the company generally pays out commissions.  If the commission has been earned, the Wage Act requires that all accrued wages be paid on an employee’s last day, if the employer terminates her employment (or on the next payroll day, if an employee resigns).  This provision of the Wage Act is likely to trump any provision in a compensation plan that the amount is not payable until a much later date.
  3. Be clear when an advance of unearned commissions is being provided to ensure that the employee does not leave employment with overpayments.  This also requires careful consideration on how an employer can claw-back overpayments, as offsets against final paychecks of earned wages may be a violation of the Wage Act itself.

Although there is no need to draft a lengthy commission plan setting forth every conceivable trigger of when a commission is “earned,” checking existing commission plans for holes –like the one that Prudential had in its plan – may help avoid surprises with potentially devastating consequences.

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