SERVING OUR CLIENTS AND COMMUNITY DURING COVID-19

Are Companies Improperly Using Force Majeure Provisions to Cheat Sales Reps Out of COVID-19 Commissions?

Employers are increasingly attempting to avoid having to pay sales employees their rightfully earned and owed sales commissions during the COVID pandemic. In many cases, a company has no legal basis to avoid paying sales representatives their earned commissions by unilaterally retroactively changing the terms and conditions of how sales commissions are earned because COVID related conditions result in an unexpected increase in sales. In these situations, a sales representative understanding of their legal rights is critical if he or she has any hope in recovering their earned commissions.

Employees who are paid through commissions rightfully rely on being timely paid their earned compensation. Commission structures also benefit employers by motivating employees to perform at or above company expectations, thereby increasing profitability for the employer and allowing the employer to identify and reward its most productive employees. The type of commission structure an employer uses can range from simple to complicated, and most of them are memorialized in employment agreements signed by both empB6D67F1E-7E48-4F4C-A59E-5470E7CCFEAF-300x169loyer and employee. Once an employee and employer agree to the terms of how commissions are earned and when they are to be paid, an employer cannot unilaterally and retroactively change the terms without breaching the contract or potentially violating wage payment law.  If an employer wishes to change the terms and conditions of a commission agreement, like any contract, they must give proper notice to the employee of the proposed change and obtain the employees clear consent to the new agreement. Often, employers who wish to alter commission structures do so to save money, which for the employee, means lower commissions and reduced income.

Sometimes, an employer is prevented from paying agreed-upon commissions due to unpredictable hardships outside of the employer’s control, like acts of terrorism or natural disasters that make performance of the contract impossible or impracticable. For an employer to protect itself from these unforeseen events, they may contain a force majeure clause in a sales agreement which potentially could release the paying party from its obligations when payment becomes impossible or impracticable.

In the age of COVID-19, some employers are attempting to rely on force majeure clauses to avoid paying earned commissions to their independent sales representatives or sales employees.  Some companies are experiencing much greater sales than expected for COVID related items like hospital ventilators or PPE due to skyrocketing demand. Rather than honoring their sales agreements and paying out their commissions to their salesforce, some companies are unilaterally changing commission structures to reduce the amounts payable. Companies and sales representatives alike are now wondering if companies can get away with relying upon these force majeure clauses to avoid paying their sales employees their otherwise owed commissions.  In most cases, the answer is no.

The law does not allow a company to use a force majeure provision in a sales agreement to avoid paying otherwise earned sales commissions unless the company can show that payment of earned commissions has become impossible or impractical as a direct result of the COVID.  Having to pay a sales commission an unusually high commission because of significant sales volume due to COVID is not enough.  Just because a sales representative earns a significant sales commission because of a COVID induced sales spike does not mean the company’s payment of the commission can be avoided under a contractual force majeure provision.  In most cases involving increased sales due to COVID, the company has benefited, and the sales representative should as well for securing the increased sales from their sales accounts.  In these situations, the company does not have a plausible argument that paying the commission would be impractical or impossible.

What the legal remedies available to sales representatives when they are denied their rightfully owed sales commissions?  Luckily for New Jersey sales representatives, our state laws include several different causes of action that protect sales representatives against companies who fail to make timely payment of earned commissions.  The ability to avail oneself to these laws will depend on certain factors, including his or her job classification, e.g., whether he or she is an employee or independent contractor.  For employees, there may be protections under the New Jersey Wage Payment law if the commission is considered a “wage” under the state wage theft statute.  For independent contractors, there may be protections under the New Jersey Sales Representative Act.  Both these laws provide sales representatives with the legal means to recover their earned commission, as well as additional penalties (an additional amount that is double of the commission owed under New Jersey Wage Payment Law and an additional amount triple of the commission owed under the New Jersey Sales Representative Act).  There may also be other causes of action should the sales representative not be eligible under either these laws such as breach of contract, promissory estoppel, unjust enrichment and breach of the duty of good faith and fair dealing.

There will undoubtedly be an increase in lawsuits involving sales representatives who believe they are not being paid their earned commissions due to COVID.  Sales commission laws are complicated and their applicability to sales representatives is very fact specific and require a thorough legal analysis from an experienced sales representative lawyer. Especially with the new challenges COVID-19 has introduced to interpreting commission structures and force majeure clauses in sales contracts, it is important for anyone who thinks they are the victim of wage theft or due unpaid commissions consults with an experienced attorney who can assist them in recovering their hard-earned sales commissions.

 

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