Understanding the Legal Difference Between Commission and Bonus under Massachusetts Wage Laws
Commissions vs. BonusesWhen it comes to incentive pay, the terms "bonus" and "commission" are often used interchangeably, but the legal implications attached to each can significantly impact both employers and employees. It's crucial to grasp the distinction, particularly under Massachusetts Wage Laws, where the Massachusetts Wage Act extends its coverage to commissions but not to bonuses.
Implications Under the Massachusetts Wage ActThe primary legal disparity lies in how commissions and bonuses are treated under the Massachusetts Wage Act. Commissions fall under the Act's definition of "wages," providing significant implications for commission-based employees. A failure to fulfill a bonus promise is a contract breach, potentially challenging to prove and costly to recover.
Commissions, being categorized as wages, invoke remedies under the Massachusetts Wage Act. Non-payment or delayed payment can trigger provisions for triple damages and the recovery of attorney fees, ensuring legal protection for employees. Commission vs. Bonus: Unraveling the TermsCalculation Determines Classification: The classification of an incentive payment hinges on its calculation method, not its nomenclature. Payments based on an individual's contribution to revenue are generally considered commissions, while those tied to overall profitability or division-wide performance are labeled bonuses.
Varied Forms of Commissions: Commissions, as defined by the Wage Act, encompass diverse structures. Whether percentage-based or flat-rate, the critical factor is individual contribution. For instance, service professionals earning based on sessions or a percentage of client revenue fall under the commission definition. Examples of Incentive Pay that Should be Considered CommissionsSales Commissions: Calculated as a percentage of revenue or "gross margin." For instance, a salesperson earning a percentage of each sale is receiving a commission.
Sales or Lead Generation Commissions: Based on an individual's contribution to the prospect pool. Even if the person is not the one closing the sale, as long as the incentive is based on that individual’s contribution to the prospect pool, it's considered a commission. Service Commissions: Common in industries like hair salons, where compensation ties to individuals served. This also occurs in the professional services area. For example, a service professional might earn a flat amount per session or per client served, or a percentage of the revenue received from that client. Both structures should fall under the definition of commissions according to the Wage Act. Examples of Incentive Pay that Should be Considered BonusesYear-End Discretionary Bonus: Determined by tangible and intangible factors. For example, a bonus could be based on good performance reviews, company or division profitability, or achievement of specific goals.
Periodic Profit Sharing: Tied to overall company or division profit, not individual performance. |
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Gray Areas and Complex Structures
Management by Objective (MBO) Target Incentives: Blending individual and group metrics, MBO incentives may blur the line between commission and bonus. Careful examination is needed to determine classification.
Supervisory Roles and Sales Performance Incentives: Incentives tied to the sales performance of subordinates may require careful examination for classification.
Supervisory Roles and Sales Performance Incentives: Incentives tied to the sales performance of subordinates may require careful examination for classification.
Conclusion
In the dynamic realm of employment incentives, discerning the legal disparities between commissions and bonuses is paramount. This understanding safeguards employee rights and empowers employers to structure compensation plans in harmony with Massachusetts Wage Laws. Whether you're an employee seeking clarity on entitlements or an employer crafting incentive structures, awareness of these legal nuances is vital for navigating Massachusetts employment laws effectively.
How Our Employment Lawyers Can Help
Our expert guidance clarifies the legal distinctions between commissions and bonuses, empowering both employees seeking entitlement clarity and employers structuring compensation plans. Navigate Massachusetts employment laws with confidence. You can use the button below to schedule a call back from a member of our team, or give us a call at 781-784-2322.
