Revised in January 2024
For some employees, a significant part of their compensation consists of commission payments. However, the employee does not automatically receive these commission payments (simply by virtue of showing up for work, unlike a base salary). Instead, the operative written commission agreement (entered into by the employer and employee) will likely require the employee to satisfy certain conditions – e.g., closing a deal or making a sale – before he/she is entitled to receive the commission payments.
In addition, these written commission agreements frequently: (a) identify the commission payout date (i.e., the date on which the employer will make the commission payment to the employee for the applicable time period) and (b) state that a condition to receiving the commission payment is that the employee is still employed on the commission payout date.
Disputes between employers and employees often arise when an employee’s employment is terminated shortly before the commission payout date.
Consider the following example:
1. An employee makes a significant sale to Buyer X in May 2017 (entitling the employee to a commission payment of $100,000 for this sale).
2. The employee’s written commission agreement states that all commission payments for sales made in 2017 will be paid on January 31, 2018.
3. The employee’s employment is terminated on November 30, 2017.
In the above example, does the employee have any legal claim against his employer? After all, the situation seems “unfair” in that the employee did what he needed to do to make a big sale to Buyer X in May 2017. And if the employer had not terminated the employee’s employment on November 30, the employee would have received a commission payment of $100,000 two months later (on January 31, 2018).
In a situation like this, the employee may have a legal claim called breach of the implied covenant of good faith and fair dealing. Under California law, all contracts (including written commission agreements) contain an implied covenant of good faith and fair dealing. This covenant prohibits all parties to the contract from unfairly interfering with the right of any other party to receive the benefits of the contract.
In the above example, the employee would argue that the employer interfered with the employee’s right to receive the benefits (e.g., the commission payments) of the written commission agreement when the employer terminated the employee’s employment, just two months before the commission payout date.
As you can imagine, the strength (or weakness) of an employee’s claim for breach of the implied covenant of good faith and fair dealing in the commission payment context depends on a number of factors. Below is a description of the likely challenges that an employee will encounter in asserting such a claim and the types of arguments that an employer is likely to assert in response:
The proximity of the termination and commission payout dates. Was the employee terminated several months before the commission payout date? A few months before the commission payout date? Or a few weeks or a few days before the commission payout date? It is much easier to demonstrate that an employer acted in “bad faith” (i.e., for the purpose of interfering with the employee’s right to receive the commission payments) when the termination date is just a few days before the all-important commission payout date.
On the other hand, “bad faith” is more difficult to prove when the termination date is several months before the commission payout date. In the latter situation, the employer will likely argue that it had no obligation to keep an allegedly poorly performing employee on its payroll simply to ensure that the employee would receive commission payments on the commission payout date several months down the line.
Alleged performance issues. Once an employee brings a claim alleging that the employer breached the implied covenant of good faith and fair dealing by failing to pay the employee the commission payments, the employer will likely argue that the employee was terminated because of performance issues (even if the employee did not actually have any performance issues). Specifically, the employer will argue that performance issues (and not the impending commission payout date) motivated the termination decision.
If so, questions to ask include: Did these performance issues suddenly arise or did they continue over a long period of time? Was the employee given a prior warning about these performance issues? Were the performance issues well-documented? In other words, does the evidence in general indicate that the employee actually had performance issues – or alternatively, does the evidence (or lack thereof) suggest that the “performance issues” argument is merely the employer’s attempt to “justify” a bad faith termination?
Click here for general information about written commission agreements under California law.
If you believe that your employer has failed to pay you commission payments to which you are entitled, call 916-612-0326 or email ([email protected]) Finley Employment Law today. We serve clients throughout California, including Sacramento, Folsom, Roseville, Granite Bay, and Elk Grove.
The information in this blog post is for general informational and advertising purposes only and is not, nor is it intended to be, legal advice. Instead, you should speak with a California employment attorney for advice regarding your individual situation.