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October 7, 2021

Employers: Protect Yourself Against Unpaid Sales Commissions Claims With Signed Commission Agreements

The following is a fictitious scenario, based on a compilation of facts from actual claims. It describes the pitfalls employers face when they don’t have written and signed commission agreements with their commission salespersons.

“James” was a commission salesperson for a large Toronto-based restaurant supply company. He lived in New York State, and his territory included the Northeastern United States. James received as compensation a biweekly “draw” plus a percentage of gross sales on goods and services he sold to clients in his territory, which was calculated at the end of each month.

Earlier this year, James received a purchase order from one of his largest clients. His employer fulfilled the order. The client was not satisfied with the quality of the goods provided and refused to pay the invoice. James wasn’t able to rectify the situation and the client canceled the order. Frustrated with the lack of support from his employer, James resigned his position.

During his exit interview, James demanded payment of the commission he claimed he had “earned” on the goods delivered to the client as well as payment of commissions on sales he had procured prior to his resignation but which had not yet been paid. His employer refused to pay either, stating that commissions are not earned until payment is received, and that James was not entitled to “trailing” commissions because he had resigned his employment. James didn’t have a written commission agreement with his employer.

James filed suit against his employer, alleging that the employer’s custom and practice was to pay commissions on all sales procured by the employee—regardless of whether payment had been received—and that the employer paid even former employees for sales procured prior to resignation for a period of six months thereafter. The employer denied both claims. The court sided with James and awarded him damages in the amount of the claimed commissions. The reason? The lack of a written commission agreement between James and his employer. The lesson? Be sure to have a written commission agreement with all salespersons paid in whole or in part on a commission basis. 

New York Labor Law §191(1)(c) requires that all employers—including those in the hotels, hospitality, and food services industry—which employ commission salespersons must have a written agreement signed by both the employer and the employee, which contains the following provisions, at a minimum:

  1. A description of how wages, salary, drawing account, commissions, and all other monies earned and payable shall be calculated
  2. If the terms of employment include payment of a recoverable draw, the frequency of reconciliation between draw and earned commissions 
  3. Details pertinent to payment of wages, salary, drawing account, commissions, and all other monies earned and payable in the case of termination of employment by either party

While there is no monetary “penalty” for noncompliance with New York Labor Law §191(1)(c), the consequences can be severe, because the law provides that the “failure of an employer to produce such written terms of employment, upon request of the commissioner, shall give rise to a presumption that the terms of employment that the commissioned salesperson has presented are the agreed terms of employment.” This is exactly what happened in James’ case. Since the employer didn’t have a signed, written agreement with James regarding payment of commissions, the court simply credited James’ version of the facts and found in his favor.

If your business employs commission salespersons in New York State, you must have a written agreement with the salesperson, signed by both parties, that details the terms and conditions upon which commissions will be paid. It’s not only required by the law, it is critical in defending against any claim for unpaid commissions. 

Barclay Damon’s Hotels, Hospitality & Food Service Team is a multidisciplinary team that has a depth of knowledge on legal issues specific to the hotels, hospitality, and food service industry, including in the areas of: corporate law; acquisitions, joint ventures, purchases, and sales; acquisition of real estate and real estate tax assessment; financing, the use of and optimization of tax credits, and other government incentives; restructuring, bankruptcy, and creditors’ rights; licensing and franchising, including intellectual property rights; liquor-license laws and regulations; labor and employment; construction; technology; and personal injury and products liability defense. Our team provides representation before applicable agencies and regulatory boards and in federal, state, and local trial and appellate courts.
 

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