Is It Legal for an Employer to Withhold Commission?
While some Americans dread the idea of a commission-based career, other personality types thrive in these competitive and often unpredictable positions. If you find that commission-structured jobs are desirable to you, it’s still important to have a comprehensive understanding of your employee rights, regardless of how your pay is structured.
Commission-Based Wages: Know Your Employee Rights
Federal law upholds that employers are responsible for fulfilling unpaid wages and commission. Commission is defined as the pay an employee earns from making a sale. Commission-based pay is typically determined in one of two ways:
- As a percentage of the employee’s total sales. This can either include a base salary plus commission, or commission only.
- As a fixed amount earned by an employee after meeting a specified target, quota, or sales goal. This is a percentage or fixed rate associated with a certain amount of sales.
Commission also influences an employee’s taxes and insurance premiums. By law, it should be calculated into an employee’s regular earnings and also affects premiums for workers’ compensation.
Unfortunately, it isn’t uncommon for sales representatives to not receive the commission they were promised. As a commission-based employee, it’s important to know your rights to be paid what you promised under your employment agreement. In most instances, an employer’s decision to withhold commission wages is illegal.
Consider the following facts concerning the payment of commission-based wages:
An employer is legally obligated to honor verbal and written contracts regarding commission pay.
While both oral and written agreements are enforceable, meaning that your employer must honor it, it can be difficult to prove that in court unless you retain necessary evidence and documentation.
As a commission-based employee, take care to hang on to any relevant communications with your employer (such as emails and copies of written contracts) and records of sales (such as receipts and invoices from vendors and clients).
Termination of employment does not release an employer from their obligation to pay commission owed.
If commission payments for all completed sales during a worker’s employment was paid prior to their termination, the employer does not owe the employee additional payment. However, an employee should still receive the commission agreed upon prior to termination if they have yet to be compensated for sales made before the employer-employee relationship was severed.
For example, it’s unlawful to withhold commission pay from a terminated employee if they completed a sale the week before losing or resigning from their job. All earned commission during employment terms should be fulfilled regardless of current employment status.
Keep in mind that the state of Tennessee upholds a 6-year statute of limitations. Consequently, a notable exception to an employer’s obligation to pay the agreed-upon commission during employment is if an employee attempts to recover the commission outside of the 6-year window.
Can an Employer Legally Withhold Commission?
While the answer can vary based on state-specific laws, there are very few instances in which an employer is legally permitted to withhold commission payment. More often than not, an employer is legally obligated to pay the commission agreed upon regardless of termination or change of heart.
In the event that a verbal or written contract was agreed upon prior to employment, your boss is legally obligated to pay you the amount of commission agreed upon. However, it’s important to note that Tennessee doesn’t currently uphold any state laws regarding the payment of bonuses or commissions.
What Is a Commission Clawback?
Clawbacks are legal inclusions that may be found in your employee contract. They involve repaying a commission payment back to the company. They’re intended to protect the company in the event of certain scenarios, such as:
- An employee makes an error. If a salesperson makes a mistake, such as miscalculating a sale, reporting their numbers incorrectly, missells a product or service, or commits an illegal act, this is grounds for a commission clawback.
- A client decides to terminate their contract early. If a company’s client decides to jump ship before their contract is fulfilled, this is grounds for a clawback. Assuming a business loses anticipated revenue after the unexpected loss of a client, it doesn’t make sense for a salesperson to receive the commission considering the revenue no longer exists.
Clawbacks typically serve as a fair way to protect the company and salespeople alike, and can also serve to motivate salespeople to retain clients and deliver excellent service rather than acting on the basis of personal gain or greed.
Can My Boss Reduce My Commission?
No. Assuming the commission structure was agreed upon in a verbal or written agreement, your employer cannot retroactively lower your commission if the sale in question was completed under those terms.
However, your employer is legally permitted to alter those terms later in your employment, although the modified terms are only applicable to sales that follow the reduction—not the sales that precede it.
Our Firm Can Help You Recover Unpaid Commission
At Donati Law, PLLC, we’re committed to protecting the rights of wronged employees. We make it a point to concentrate our full attention, energy, and effort on a client-by-client basis to provide the exceptional and personalized service you deserve.
If you find yourself struggling to collect commission compensation that you are rightfully owed, we’re here to step in. Our skilled employment law attorneys have over 35 years of legal experience assisting mistreated employees in the workplace, and will fight to recover the compensation you are due.
Don’t be bullied into accepting nonpayment for honest work. Our experienced attorneys are here to help you claim what’s rightfully yours. Call (901) 209-5500 to request your initial consultation today.