Paying by Commission

If your startup’s business model depends on sales, sales, and sales (or even if it doesn’t), you might hire someone whose responsibility it is to simply drive sales. And you might decide to pay them solely on commission, usually for a couple of reasons: one, it motivates them to sell — the more they sell, the more they make; and two, oftentimes a startup may not have the cash to guarantee a wage or salary if sales aren’t coming in the door. However, paying an employee solely on commission can have pitfalls, usually related to when the employee is to be paid and how much the employee is paid. The payment of commissions is subject to the Massachusetts Wage Act, which, aside from requiring weekly or bi-weekly pay periods, treats commissions as wages to be paid when “the amount of such commissions…has been definitely determined and has become due and payable to such employee.” When a commission becomes due and payable generally depends on the agreement between the employer and employee. Ideally, you have a written agreement with your employee, but in lieu of one a court can look to the understanding of the parties based on written and oral correspondence. The agreement between employer and employee controls when a commission becomes due and payable through a number of factors, such as when the employee is considered to have made a “sale” and the method by which the commission is to be calculated. For example, some agreement may consider the employee to have made a sale only on the execution of a contract; others may simply require the employee to produce a customer ready and willing to enter into a contract. The amount of commission is generally dependent on the size of the sale, which for sales of ongoing services and the like may be difficult to quantify at the outset. Companies can also run into trouble by not paying their commission employees enough. “Outside sales” employees (such as traveling salespersons) are generally exempt from federal and Massachusetts minimum wage, but “inside sales” employees, who work out of the company’s place of business, are subject to minimum. Therefore, if the commissions over a pay period do not equal time worked (including overtime under Massachusetts law) at minimum wage, the company usually has to make up the difference. Of course, if the employee’s commissions exceed minimum wage pay, there is no difference for the company to make up. To solve this issue, some companies institute a draw program, where a company issues a draw, or advanced commissions, that ensures that the employee is paid minimum wage, and is applied against future commissions. If your startup hires an employee that is paid solely on commission, it is important to know, based on your agreement, when commissions become due and payable as wages, and ensure that your employee is making at least minimum wage, either by making up the difference pay period to pay period, or setting up a draw program.

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