Commission Pay Under the Massachusetts Wage Act
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Many employees work under a compensation structure that includes commission pay. While it is clear how Massachusetts wage and hour laws apply to salary or hourly wage payments, it can be less clear for employees who are paid (in whole or part) on a commission basis.
It is important to understand whether your commission pay falls within the wage and hour laws, what your rights are to timely payment if it does, and how commission pay affects your rights under the minimum wage laws. What is Commission Pay?There are different forms of incentive pay, that are sometimes called bonuses and sometimes called commissions. The difference matters, because the Massachusetts Wage Act applies to commissions but not to bonuses.
Regardless of the label, incentive pay is a commission if it is earned by the employee as a result of his or her contribution to revenue. For example, a sales person who is paid a percentage of each sale is receiving a commission. Incentive payments that are triggered by performance evaluations or overall profitability are bonuses and not subject to the Wage Act. It does not matter whether it is called a commission or a bonus, or what type of commission it is. What matters is whether it functions as a commission. If it does, those amounts owed are "wages" that are subject to the Massachusetts Wage Act. Payment of Commissions After TerminationThe Wage Act applies to sales commissions as soon as they are earned. When a commission is earned can vary according to the company's commission plan. The policy can state that the commission is earned by the employee upon completion of a purchase order. There are also commission plans that state a commission is not earned until the customer pays for the product or service.
When an employee earns a commission is especially important when the employment relationship ends. If the commission structure entitles an employee to commission when an order is placed or contract signed, that employee may leave or be fired before the company receives payment. The company may still have to pay the employee that commission on termination or resignation. |
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Minimum Wage and Commission Payments
Employers should be careful about the overlap between commissions and minimum wage and overtime laws.
Do you have to pay minimum wage to commission employees? Maybe. Some employees are compensated based on straight commissions with no base salary or guaranteed draw against commissions. This can mean their earnings fluctuate from week to week or month to month. The employer should make sure that what they are receiving each week is at least equal to the minimum wage for the hours worked. Otherwise, the employee may have a legal claim to the difference and to multiple damages.
Employees paid on a straight commission, if they are not exempt from overtime, are also entitled to overtime pay for hours worked over 40 in a week. Recent case law has clarified how the overtime pay premium should be calculated. Under these rulings, many commission-based employees who work overtime may not be properly compensated.
Do you have to pay minimum wage to commission employees? Maybe. Some employees are compensated based on straight commissions with no base salary or guaranteed draw against commissions. This can mean their earnings fluctuate from week to week or month to month. The employer should make sure that what they are receiving each week is at least equal to the minimum wage for the hours worked. Otherwise, the employee may have a legal claim to the difference and to multiple damages.
Employees paid on a straight commission, if they are not exempt from overtime, are also entitled to overtime pay for hours worked over 40 in a week. Recent case law has clarified how the overtime pay premium should be calculated. Under these rulings, many commission-based employees who work overtime may not be properly compensated.
Deductions from Commissions
Because commissions are wages, they are subject to the same rules about when the employer can make payroll deductions from commissions. Read more about wage deductions under Massachusetts law, including deductions from commissions.
Withholding Commission Payments: Legal Liability
It is important to understand the consequences for getting this wrong.
If an employee is not payed earned commissions timely, that is a violation of the Massachusetts Wage Act. That means the employer may have to pay not only the unpaid commissions but three times that amount. It also means the employer could be liable for all of the employee's attorneys fees and costs, on top of your own defense costs.
The other potential consequence is that you may be unable to enforce an otherwise valid non compete agreement with your employee. If they are not paid according to their employment agreement, they may be able to argue that you breached the employment agreement and are therefore not entitled to hold them to their non compete promise.
If an employee is not payed earned commissions timely, that is a violation of the Massachusetts Wage Act. That means the employer may have to pay not only the unpaid commissions but three times that amount. It also means the employer could be liable for all of the employee's attorneys fees and costs, on top of your own defense costs.
The other potential consequence is that you may be unable to enforce an otherwise valid non compete agreement with your employee. If they are not paid according to their employment agreement, they may be able to argue that you breached the employment agreement and are therefore not entitled to hold them to their non compete promise.
Pros and Cons of Commission Pay
For a small business owner, making commissions or incentive pay part of the compensation package can be very attractive. Commissions can serve as an incentive to increase worker productivity. They can also make compensation expressly tied to revenue and the amount of goods or services provided. Where cash flow is a primary concern for the business owner, this can be a great solution.
The disadvantage lies in the uncertainty. This is especially true if you do not have a written commission plan that makes clear when commissions are earned and payable. Most of the disadvantages can be addressed by creating a clear policy and making sure your employees understand it and you follow it.
The disadvantage lies in the uncertainty. This is especially true if you do not have a written commission plan that makes clear when commissions are earned and payable. Most of the disadvantages can be addressed by creating a clear policy and making sure your employees understand it and you follow it.
How We Can Help
We can help you understand your rights and obligations as a commission based employee or a small business with employees paid on commission. 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.
