Commissions for a Terminated Salesperson

Steven Cesare, Ph.D.

I was recently contacted by a business owner from California regarding his understanding of commission payments for a salesperson who would soon be leaving his company. He explained to me that during the meeting in which the salesperson informed the owner of his departure, the salesperson told the owner that he expected to be paid all outstanding commission payments at the time of his last day on the job when he would receive his final paycheck. In turn, the owner referenced a policy stipulating that outstanding commissions are not paid to employees who no longer work for the company. This did not sit well with the lame-duck salesperson. Shortly after that meeting, the owner called me for guidance.

In general, unique state laws notwithstanding, both the owner and the salesperson were incorrect in their interpretations of this event. First, the owner is incorrect in that outstanding commissions must be paid to those sales employees who conducted the sale, even if they are no longer employed by the company. Any company policy stating that an outstanding sales commission is forfeited at the time of employee dismissal is typically unenforceable. The rule of thumb regarding commission payments is that the salesperson must receive a commission payment during the first regularly-scheduled payroll run after the company receives payment from the client.

Following that point, unless a written agreement shows otherwise if a salesperson gets a signed contract from a client, the salesperson does not receive a commission at that point in time; nor does the salesperson receive a commission when the client work begins. The salesperson typically receives a commission payment, during the first regularly-scheduled payroll run after the client makes a payment to the organization for that contract. This structure applies to sales employees who are either currently working for the company or who have left the company. Thus, in the original incident, the salesperson’s request to receive all outstanding commission payments as part of his final paycheck was also incorrect. The terminated salesperson should receive a commission payment during the first-regularly-scheduled payroll run after the company receives client payment.

For example, if the salesperson receives a signed contract from the client on January 2nd, for a job that begins on March 1st, and the salesperson resigns his position on March 8th, the salesperson would not receive his rightful commission until the client made payment to the company for the invoice related to the March 1st start date.

If you have any questions or comments about this topic or anything else related to human resources, simply call me at (760) 685-3800.