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Decision highlights strict sales commission obligations

finley-garyMassachusetts employers that pay sales commissions to employees should take careful note of a recent federal court decision that bolsters employees’ rights, in some circumstances, to receive sales commissions even after their employment terminates.

In Israel v. Voya Institutional Plan Services, LLC, U.S. District Court Judge Allison D. Burroughs ruled that, under the Massachusetts Wage Act, a former employee was entitled to approximately $32,000 in sales commissions following his resignation, despite the fact that the commission plan specifically provided that employees who resigned were not eligible to receive any further commissions.

Because the commissions had become “due and payable,” with their amount “definitely determined,” Burroughs held that the employer could not refuse to pay the commissions, notwithstanding the conflicting language of its commission plan.

The Massachusetts Wage Act

Among other things, the Wage Act addresses what types of payments qualify as “wages,” and the timing, manner and frequency with which employees must be paid their wages. An employer that violates the Wage Act can face stiff sanctions, including mandatory treble damages, attorneys’ fees and court costs.

The Wage Act specifically mandates that sales commissions be paid when their amounts are “definitely determined,” so that the commissions have become “due and payable.” It was that requirement of the Wage Act that was at issue in the Israel case.

Voya’s commission plan

The plaintiff in the case, Joel Israel, began working for Voya Institutional Plan Services in November 2013 as a sales representative in retirement services.

Israel earned a base salary and also was eligible for variable compensation based on sales. In that regard, Voya’s commission plan provided that Israel would earn commissions when individual investors allowed Voya to make certain investment decisions on their behalf (referred to in the plan as “production activities”).

Under the terms of the plan, an eligible Voya employee was entitled to payment of a commission “in the payroll immediately following the third month after the month [that a] production activity occur[red],” so long as certain contingencies were met.

In particular, the plan required that an employee “fulfill his/her duties satisfactorily, and in a manner that enhances the image and reputation of [Voya], each as determined by [Voya] in its sole discretion.”

Further, the plan provided that an employee who resigned from Voya would “not be entitled to any pro-rated payment” of commissions following his or her resignation.

Israel’s resignation from Voya

In July 2014, Israel applied to transfer to a position with a different Voya entity. While considering his application, Voya came to believe that Israel had not been truthful about his stated reason for leaving his previous employment. Ultimately, Voya informed Israel that it not only would not allow him to transfer but intended to terminate his employment (which was at will).

Voya gave Israel the opportunity to resign in lieu of termination, and on Sept. 26, 2014, Israel submitted his resignation.

At the time of the separation, Israel had approximately $32,000 in pending sales commissions that had not yet become payable under the terms of the plan, due to the three-month payment lag provided for in the plan. Further, under the terms of the plan, Israel’s resignation disqualified him from eligibility for any additional commissions.

Accordingly, Voya did not provide any commission payments to Israel upon his separation or at any time thereafter.

The court’s decision

Following his resignation, Israel filed suit against Voya, asserting a claim under the Wage Act for payment of the disputed sales commissions. The parties eventually each filed motions for summary judgment.

In support of his motion, Israel relied on two theories: (1) because he would have been fired had he not resigned, his separation should be deemed an involuntary termination, thereby potentially entitling him to post-termination commissions under the terms of the plan; or, alternatively, (2) the Wage Act entitled Israel to payment of the commissions regardless of the circumstances of his departure from Voya, because the commissions were “definitely determined” at the time of his separation and, thus, were “due and payable” to Israel, regardless of any contrary provision in the plan.

As to Israel’s first argument, the judge sided with Voya. Because Israel had benefited by being able to report his separation to the Financial Industry Regulatory Authority (with which Israel was a registered representative) as a resignation rather than an involuntary termination, Burroughs concluded that it would be inequitable to allow him to contradict that representation to FINRA by claiming that he had been terminated involuntarily, simply to qualify for further sales commissions under the plan.

However, Burroughs ruled for Israel on his second argument, holding that the Wage Act entitled him to payment of the commissions, notwithstanding the plan’s explicit provision that an employee who resigned was not entitled to any further commissions.

In other words, Burroughs held that the terms of Voya’s plan could not override the Wage Act’s strict requirement that sales commissions be paid promptly once their amounts have been “definitely determined,” such that the commissions have become “due and payable.”

In reaching that conclusion, the judge explicitly distinguished sales commissions from other types of variable compensation, such as bonuses.

As Burroughs noted, there are legitimate reasons for an employer to restrict bonus eligibility to individuals who remain employed in good standing, as bonuses are typically determined based on overall employee and company performance and are designed to incentivize employees to remain employed.

By contrast, since a commission is simply an agreed-upon share of sales revenues generated by a specific employee, she held that it would be contrary to the fundamental purpose of the Wage Act — to “provide robust protection for employees against the unreasonable detention of wages” — for an employer to be able to withhold commissions that have been “definitely determined,” based merely on an employee’s decision to resign.

Recommendations for employers

As the Israel decision highlights, the Wage Act’s strict payment requirements can readily override conflicting provisions in employers’ commission plans. Once a sale has been completed, so that the amount of the commission for the transaction has been “definitely determined,” the Wage Act provides an employer with little (if any) leeway for withholding the commission, regardless of any conflicting provisions in its commission plan.

Accordingly, Massachusetts employers that provide sales commissions to employees should carefully review their written commission plans and consider whether the plans contain any restrictions that may run afoul of the Wage Act.

More generally, given the stiff sanctions provided for in the Wage Act, Massachusetts employers would be wise to conduct periodic, broad audits of their payroll practices, in order to determine whether they are in compliance with the Wage Act and to address any shortcomings.

Gary D. Finley is an attorney at Schwartz Hannum in Andover, Massachusetts. The firm represents management in labor and employment law matters, and educational institutions.

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