SERVING OUR CLIENTS AND COMMUNITY DURING COVID-19

Articles Posted in Sales Rep Law

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.

Termination clauses are among the most important aspects of any independent sales representation agreement.  Without a strong termination clause, an independent manufacturing representative is left without little legal protection should the principle decide it no longer needs its services.

The recent Tax Court case Potter v Commissioner, T.C.M. 2018-153 (T.C. Sep. 17, 2018)   provides a great example of the type of protection that a termination clause can provide to a manufacturing representative.  In that case, Jeff Potter worked as an independent contractor for a company called Green Country, which was in the business of selling garden soil and other related products.  Mr. Potter was well represented when drafting his sales representative contract and was protected by a strong termination clause.  The clause stipulated that if his compensation agreement was terminated, he would be owed a termination payout equal to 150% of his commissions from the previous year.  When his agreement was terminated, the company compensated in accordance with this clause.  The lawsuit that followed did not contest this payment, the dispute was merely over the federal income tax implications of the termination payment.

As we see in Potter, one approach to contracting for compensation in the event the sales representation contract is terminated is to structure it as a payout equal to a percentage of commissions paid over the previous year, or some other period of time.  This is of course not the only way to structure a termination clause pay out. Another popular approach is to structure it in terms of a percentage of sales made on accounts that the independent sales representative generated.  This, in effect, would allow the sales representative to continue earning a commission on sales that were properly attributable to their own work efforts. In order to provide real protection, termination clauses must be negotiated as a part of the initial contract. As a result, some sales representatives may prefer to structure the clause in terms of a flat rate, like a liquidated damages clause.

A New Jersey District Court has allowed an independent sales representative to proceed with his lawsuit against his principal company for failing to pay his earned sales commissions.  This case reaffirms New Jersey’s strong public policy in assuring sales representatives are timely paid their earned sales commissions.

Prior to New Jersey passing the Sales Representatives’ Rights Act,  independent sales representatives often faced an uphill battle when it came to legal disputes concerning unpaid commissions. As an independent contractor who is paid on a 1099 basis, New Jersey Wage Payment law does not protect independent sales representatives from being paid their sales commissions because they are not considered employees under the law.  In recognizing the need to protect independent sales representatives from receiving their hard-earned commissions, New Jersey enacted the New Jersey Sales Representatives’ Rights Act that allows for sales representatives to sue for their unpaid earned commissions and imposes significant penalties against principals for failing to pay the commissions in a timely manner.

In the recent case TLE Marketing Co. v. WBM, LLC, No. CV-17-11752 Slip Op. (D.N.J. Sep. 14, 2018) the plaintiff raised a novel argument that, if successful, could expand the reach of the Act.  TLE Marketing Corporation is an independent sales agency based in Minneapolis, Minnesota, and has been providing marketing and sales representation for companies since 1976.  WBM, LLC is a developer, importer, and distributor of a variety of distinctive products, with a primary focus on Himalayan salt products.  WBM is based out of Flemington, New Jersey and has been in business for over 20 years.  Starting in 2007, TLE and WBM began working together, signing a sales representative contract that provided that TLE would market and sell WBM products.  The two companies enjoyed a lengthy business relationship of almost 10 years until, in June 2017, WBM terminated the sales representative contract.  In response, TLE filed a complaint in Minnesota alleging wrongful termination, breach of contract, and failure to pay commissions in violation of Minnesota state statute.

It is surprising for many independent sales representatives to learn that there are specific laws in place to protect the recovery of their unpaid sales commissions from their principal.  In fact, many independent sales representatives equate an unpaid sales commission to that of an unsecured debt, often simply writing off the unpaid sales commission as an uncollectable debt, not worth their time, money or other resources in trying to recover from the principal.  In their view, they believe they will spend more money on an attorney trying to recover the unpaid sale commission than the amount the debt is worth in the first place.  As a result, the independent sales representative will simply abandon their hard earned unpaid sales commission.

Unbeknownst to a lot of independent sales representatives, many states have laws impose significant penalties against principals who fail to pay sales commissions.  In fact, some states have laws that have stronger protection to independent sales representatives’ from receiving unpaid sales commissions than are in place for employees from receiving his or her unpaid wages.  In New Jersey, for example, our legislature has enacted The Independent Sales Representative Rights Act, which provides for payment of all unpaid commissions, treble damages in an amount three times of the unpaid sales commission, as well as attorney fees and costs of suit against principals who fail to timely pay their independent sales representatives their earned sales commission.  This means that if you are an independent sales representative who is owed a sales commission in the amount of $2,000, you could recover up to $8,000 for the unpaid sales commission and all attorney fees and costs incurred in attempting to recover the debt.  Many other states outside New Jersey have a similar law in place.  The remedies provided under laws like New Jersey Sales Representative Rights Act encourage law firms like ours to take unpaid sales commission cases on a contingency basis.  This means in most of our cases, our attorneys do not get paid for any of the legal work they perform unless the independent sales representative gets paid the sales commission.

It is important for all independent sales representatives to know their rights in connection with recovering unpaid sales commissions.  If you are an independent sales representative, who has not been paid an earned sales commission, I strongly encourage you to reach to our firm or an attorney familiar with your particular states unpaid sales commission law, to discuss your options in recovering your hard earned sales commission.

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