Payment of Commissions Under the Massachusetts Wage Act

What is the Massachusetts Wage Act?

The Massachusetts Wage Act requires that all employees be paid within six days of the end of the pay period. The Wage Act also requires that an employee who is terminated be paid all wages owed at the time of termination. If an employee resigns, all outstanding wages must still be paid to the employee but can be paid in the next regular payroll.

Violation of the Wage Act can have serious consequences for the employer. If failure to pay is proven, the employer will have to pay triple damages plus the employee's attorneys fees and costs.

Does the Wage Act Apply to Commissions?

The Wage Act applies to commission pay if the commissions are 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.

When Are Commissions Earned?

The 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.

Commissions and Minimum Wage and Overtime Laws

Employers should be careful about the overlap between commissions and minimum wage and overtime laws.

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.

Legal Liability for Non Payment of Commissions

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.

Pros and Cons of Paying Commissions

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.

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, give us a call at 781-784-2322, or fill out our web form to let us know a little more about your situation.

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