8/3/2018 PAYING FOR PERFORMANCE. BONUS vs. COMMISSION BONUS AND COMMISSION PLANS CAREFUL DRAFTING CAN AVOID PROBLEMS

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1 American Payroll Association NorthStar Chapter August 16, 2018 BONUS AND COMMISSION PLANS CAREFUL DRAFTING CAN AVOID PROBLEMS V. John Ella, Attorney at Law TREPANIER MACGILLIS BATTINA P.A Flour Exchange Building 310 Fourth Avenue South Minneapolis, MN Phone: PAYING FOR PERFORMANCE Bonuses and commissions are useful compensation tools for employers. They: Th Incentivize hard work and sales; Increase productivity; Help to recruit and retain talent; Promote fairness and objectivity; and Allocate some risk to the employee. BONUS vs. COMMISSION Bonus v. Commission: No precise distinction under the law. BONUS: Paid for meeting certain performance requirements, goals, or other criteria. Could be based on performance of the company; a unit, team or division; or the individual. Could be monthly, quarterly, annually, or upon achievement of a goal. Sometimes paid for merely staying employed for a certain period time (retention or stay bonus) or even upon employment (signing bonus). Can be discretionary, based on language of the agreement. Can be waived or forfeited. Almost always offered in addition to regular base pay or other compensation. 1

2 BONUS vs. COMMISSION COMMISSION: Usually a more objective, mathematical calculation. Usually based on a percentage of total dollars of sales of goods or services. Sometimes the only or primary form of compensation for an employee. Not as discretionary Employer may be obligated to pay commissions to the salesperson who has been the procuring cause of a sale, even if the employee leaves or terminated for cause. May be in conjunction with a draw against commission. Commissioned sales people must receive a minimum wage. CONTRACTS Bonus and commission arrangements are contracts, whether they are or are not in writing. Properly drafted written contracts prevent misunderstandings, miscalculations, and legal disputes. Confirm thatt th the tterms were di distributed C fi th t ib t d tto affected ff t d employees. l Get confirmation with a signature. Changes can be made at any time prospectively. New, more favorable bonus or commission opportunities might serve as consideration for a non compete or other restrictive covenant. DRAFTING A PLAN Start with plain English and bare bones Define key terms Challenge the terms with different scenarios: Employee does well Employee does poorly Employee leaves mid year Employee is fired mid year Revise as necessary 2

3 DRAFTING A COMMISSION PLAN DEFINE HOW THE COMMISSION IS CALCULATED Objective is better than subjective Use metrics you can track (sales, revenue, placements, billable hours) Define D fi assigned i d accounts t Create a mechanism to track the metrics during the year Avoid uncertainty and expense consider and define chargebacks, cancellations, adjustments, rebates, returns, credits, discounts, etc. Consider complicated situations (such as collaborative efforts, split commissions, and house accounts) DRAFTING A COMMISSION PLAN DEFINE HOW THE COMMISSION IS CALCULATED Do different commission rates apply? Different products? New business versus repeat business? House H accounts? t? Stair stepped by dollar amounts? Are commissions rates likely to change year to year? Avoid ways to game the system or manipulate the books. DRAFTING A COMMISSION PLAN DEFINE WHEN THE COMMISSION IS EARNED AND WHEN IT IS PAID Vague terms cause litigation Pipeline commissions What do you do when an employee leaves, but has completed significant work on a sale? Payable upon: Signed contract or purchase order Shipment of goods Receipt of goods Completion of project Payment received by company Payment received plus time for adjustments? 3

4 DRAFTING A BONUS PLAN COMMON PRACTICES AND TERMINOLOGY Many states, including Minnesota, uphold provisions that require an employee to be employed on a certain date in order to be eligible for a bonus. For annual bonuses, often January or February of the next calendar year year. What is discretionary? It is common to give the employer sole discretion in interpreting the plan. Caps on bonuses are usually enforceable if clearly stated in the contract. DRAFTING WHAT IF AN EMPLOYEE IS OVER PAID? Helpful if the plan allows for adjustments and corrections Be wary of Minnesota law on deductions from wages HEADACHES FOR THE PAYROLL DEPARTMENT Bonuses and Commissions are much more variable. May need confirmation over and above a time sheet sheet. Make sure software and IT solutions support your needs. 4

5 CALCULATING OVERTIME BASED ON NON DISCRETIONARY BONUSES Nondiscretionary bonuses are considered part of an employee s regular rate of pay for calculation of overtime under the FLSA. FLSA If you are responsible for payroll, make sure you are aware of all bonuses are being offered and paid. If it is part of a plan, contract, agreement or promise, assume it is not non discretionary. CALCULATING OVERTIME BASED ON NON DISCRETIONARY BONUSES Where the employer offers a bonus on a regular basis and an employee has come to expect it, the bonus will likely be considered nondiscretionary nondiscretionary. Determine whether the bonus should be spread out over a week, a pay period, a month or a year. LEGAL CLAIMS FOR UNPAID WAGES Chapter 181 of Minnesota Statutes Minn. Stat applies to claims for earned and unpaid wages and commissions by discharged employees. Minn. Stat applies to claims for earned and unpaid wages and commissions by employees who resign. Minn. Stat applies to claims for commissions by salespeople who are independent contractors and not employees. 5

6 SECTION UNPAID WAGES FOR TERMINATED EMPLOYEES Wages and commissions actually earned and unpaid at the time of discharge are immediately due and payable upon written demand of employee. Employer has 24 hours to pay after written demand or risk penalty. Discharged employee may also charge and recover a penalty for each day, up to 15 days, that employer is in default. The penalty is employee s average daily earnings at regular rate of pay or rate required by law, whichever is greater. Allows for recovery of attorney s fees. SECTION UNPAID WAGES FOR EMPLOYEES WHO RESIGN Employer must pay all wages owed no later than the first regularly scheduled payday following final day of employment. This does not apply if employee is subject to collective bargaining agreement with a different provision. If the first regularly scheduled payday is less than five (5) calendar days from the final day, full payment may be delayed until the second regularly scheduled payday but may not exceed twenty (20) calendar days. Employer has 24 hours to pay after written demand by employee or risk penalty Allows for recovery of attorney s fees. SECTION UNPAID WAGES FOR INDEPENDENT CONTRACTORS Employer must promptly pay the independent contract all commissions g last dayy of employment. p y earned through If employer fails to pay commissions, employer shall be liable for a penalty for each day, not to exceed 15 days, of 1/15 of the commissions earned through last day of employment. Essentially allows for recovery of double damages. Allows for recovery of attorney s fees. 6

7 SECTION Allows for double damages for unpaid commissions earned through the last day of employment after the employee has resigned or been terminated if the employer has alter[ed] the method of payment, timing of payment, or procedures for payment of commissions earned through the last day of employment if the result is to delay or reduce the amount of payment. LEGAL CLAIMS BOTTOM LINE Claims for unpaid commissions or bonuses will often result in: Liability for the actual amount; A penalty of either 15 days of wages OR double damages; and Payment of the other side s attorney s fees. You want to avoid legal claims! CERTAIN CIRCUMSTANCES IF EMPLOYER DISPUTES WAGE AMOUNT OWED (Minn. Stat , subd. 3): Employer can tender the amount it believes, in good faith, due to employee Employer will not be liable for any sum greater than the amount tendered and interest on that amount unless employee recovers a greater sum in court p y responsible p p if employee p y fails to recover more than for cost of suit except Employer tendered DELAY FOR EMPLOYEES ENTRUSTED WITH MONEY/PROPERTY (Minn. Stat , subd. 4): If employee was entrusted with collection, disbursement, or handling of money or property Employer has ten calendar days after conclusion of employment to audit and adjust accounts before paying wages (whether termination or resignation) 7

8 OTHER LEGAL CLAIMS UNJUST ENRICHMENT No written agreement between the parties Employee performed valuable services for employer Employer did not pay for those services but received a benefit Can also apply to commissioned workers and independent contractors When an employer does not pay a commission, the employer receives a benefit equal to the amount of commission payable to the employee that it is not entitled to, since the employee is entitled to it by virtue of her work. It would be unjust to allow the employer to retain [the employee s portion of the overall commission. Evenson v. Hanson, No. A03 125, 2003 Minn. App. Lexis 1239 (Minn. Ct. App 2003). QUANTUM MERUIT A worker is entitled to the fair value of the work performed Used when there is no specific agreement as to rates or amounts 8

9 BAD FAITH TERMINATION Employee alleges that he or she was fired shortly before the payment date of a bonus or commission specifically to avoid the payment of the bonus or commission EMPLOYEE S BREACH OF DUTY OF LOYALTY EMPLOYEE S BREACH OF DUTY OF LOYALTY Employees owe a duty of loyalty to their employers. An employer may recover damages or withhold the payment of wages or commissions in the event of a breach of the duty of loyalty. If an employee is found to have breached his duty of loyalty, he is deemed to have never effectively earned the commissions or wages he is claiming. Perhaps the ONLY recognized defense for employers in withholding commissions, bonuses, and wages. 9

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