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Disputes over Unpaid Sales Commissions and Bonus Payments: When Does a Mere Expectation Become into an "Earned" Wage? Part I -Performance-Based Employment Compensation as a Unilateral Contract

Most employees are paid for their time. Thus, if they work eight hours at a rate of $25 per hour, or eight weeks at a salary of $2,500 per week, there is little dispute over the amount of wages owed. But disputes begin to multiply where the payment is deferred and is calculated based on meeting certain performance targets. Typical disputes include the following:

 
• What must the employee do to be considered the originator of a particular sale?
• What happens if the employee closes a sale but the customer never pays for the product?
• What if the salesman closed the sale but the company ships a defective product or otherwise causes the sale to be cancelled?
• What if the commission formula is based on meeting an annual target, but the Company decides to restructure the commission formula halfway through the year?
• What if the employee quits or is terminated after making a sale but before the customer has paid for product?

The first (but by no means the last) step to resolving these questions is to examine the terms of the parties’ contract. To do so, it is important to realize that under California law an enforceable commission contract is typically formed based on the company’s written policies or other communications to the employee concerning what commissions or bonuses he can expect if specified criteria are achieved. This is true regardless of disclaimers stating that the employment itself is terminable at-will or that there is supposedly no contract “of employment.”

In other words, it is not necessary for the parties to have a signed piece of paper for a valid compensation contract to exist. Rather, California generally follows a “unilateral contract” theory of employment compensation. A unilateral contract is one in which a “unilateral” offer to pay for performance is communicated by the employer (e.g., an employer policy stating that “an employee selling $100K in product will be paid a 10% commission”). The employee simultaneously accepts the offer and performs his side of the contract by doing the specified task (i.e., selling $100K in product).

A vested right to a commission payment thus usually arises immediately when the employee performs the requested services, closes the sale, stays employed throughout the year, or achieves any another specified goal. As a result, the employer may be legally barred from thereafter attempting to change the commission structure in a way that would prevent the employee from eventually collecting this entire “earned” commission.

Many employers mistakenly believe that if an employee can be terminated “at-will” his or her commissions may also be reduced at-will. Another common belief is that commissions are only “earned” when they are actually paid out by the employer. At least as to commissions on past sales, these assumptions are usually incorrect as a matter of law.

Understanding exactly when and how a commission or bonus becomes “earned” and vested according to common contract provisions will be addressed in greater detail in future posts. In the meantime, however, it is important to at least recognize the basic legal concept of the "unilateral contract."

Full post as published by California Labor & Employment Defense Blog on August 03, 2008 (boomark / email).