Commission Vs. Bonus

Steven Cesare, Ph.D.

A business owner from Massachusetts called me the other day to talk about a salesperson who wants to be paid commissions for jobs that he sold several months ago, even though the salesperson quit his job last month. This issue comes up all the time and like many wage and hour topics must be viewed within the context of federal and state law before rendering a decision. That said, the burden of proof almost always resides exclusively with the employer.

Upon request, the owner informed me the salesperson received a weekly base salary of $1,550.00 and a commission of 2% on new contract sales. Lamentably, while this nominal agreement was in place between the owner and the salesperson, a written formal Sales Commission Agreement was never instituted. That annual Agreement would have specified the terms associated with myriad relevant factors (e.g., sales goals, commission rates, commission eligibility, and post-termination payments).

Being pragmatic, the owner’s position was that post-termination payment should be withheld since part of the commission was related to the salesperson’s responsibility to oversee the job until finality. Since the salesperson resigned his position before job closure, the owner believed that payment balance should not be granted.

Apples and oranges.

In general, a commission is a form of compensation typically paid based on a percentage of the cost or sale price of the product or service sold. For example, the company can offer a 1% commission on all enhancements sold by an Account Manager, or 2% commission on all new maintenance contracts sold by a salesperson, or 3% commission on all landscape maintenance contracts in excess of $50,000 per month.

In general, a bonus is a form of compensation when extra pay is typically given to an employee for exceptional performance. Discretionary bonuses notwithstanding, if a company offers additional compensation to an employee for achieving a performance goal, that compensation now constitutes a bonus. For example, the company can offer a $500 bonus to its workforce for all new employee referrals brought into the company, or a $1,000 bonus if a job is completed with a gross margin in excess of the forecasted estimate, or a $5,000 bonus if a construction job is completed without any call-back work.

It appears the business owner conflated commission pay and bonus pay in his agreement with the salesperson. In common practice, the salesperson is entitled to his full commission for the job in question since the salesperson did in fact sell the job. However, the business owner should have distinguished between the compensation due to the salesperson based on sales activities (i.e., commission) and the additional project management activities (i.e., bonus) he expected the salesperson to fulfill, and documented that detail in the Sales Commission Agreement with the salesperson. Without the distinction, the business owner will have to pay the entire 2% commission on the job sold to the salesperson, even though the ongoing project management role was unfulfilled since that bonus performance goal was not specified.