Structuring commissions as bonuses could help employers save significant costs under Michigan’s Sales Representative Act.
Once upon a time, there were a lot of unhappy auto industry sales representatives in Michigan who were not being paid all of the commissions they felt they had earned.
Their cries did not go unheard by the Michigan Legislature which, in 1992, passed the Sales Representative Act, MCL 600.2961 (SRA). It is very pro-sales representative and applies whether there is an independent contractor or employment relationship.
The SRA, however, only applies to commissions resulting from selling products, not services. But this is broadly defined (i.e., a lawn fertilizing service is a product, not a service). Regardless of whether the SRA applies, the procuring cause doctrine may be applied to commissions, granting the sales representative the right to receive payments for as long as the purchase order continues, which can be years, or the relationship with the customer exists.
The SRA provides that: “[a]ll commissions that are due at the time of termination … shall be paid within 45 days after the date of termination. Commissions that become due after the termination date shall be paid within 45 days after the date on which the commission became due.” If the employer (or principal) fails to pay all amounts due, the sales representative is entitled to: (a) actual damages; and (b) an amount equal to two times the amount of commissions due but not paid or $100,000 (whichever is less) for a willful violation.
The Michigan Court of Appeals has held that unless the failure to pay is the result of an error in the calculations, it is a willful violation. This is true even if the principal (or employer) has a good faith dispute concerning the payment, such as another sales person actually “closed the deal or serviced the customer.”
Significantly, the SRA prohibits a contract between a principal and a sales representative purporting to waive any right under this section is void. Thus, a contract must be properly written to avoid the “earning” of commissions and then the waiving of the right to payment when the relationship terminates. Finally, the prevailing party (whether sales representative or principal) is entitled to reasonable attorney fees and costs.
In Speet v Sintel, Inc, a recent unpublished case of the Michigan Court of Appeals, there was a 2001 agreement between the parties that provided for commissions for the generation of certain new business. It also contained a clause stating: “This commission arrangement may be terminated by either party upon 90 days written notice. Sintel is responsible for paying commissions only on shipments that occur with in [sic] 90 days after termination.” Sintel was purchased by new owners in 2011 and a new agreement was entered in 2012 that stated: “I [Speet] will support the parts/projects(s) as project liaison (sales rep.) and retain the account for the life of the project but no later than April of 2014 at which time I would like to renegotiate and renew the terms and conditions of this contract.” The 2012 agreement did not provide a termination clause.
We know nothing else about the terms in the 2001 agreement, but I suspect that it must have been written in such a way that caused the earning of commissions upon shipment of the product. Otherwise, if the commissions were earned at some earlier point in time (such as when the order is written or the customer signs the contract contract), it is conceivable that commissions could have been earned by Speet, but not payable to him because shipments may have occurred after the 90-day period following termination of the agreement. This may be viewed as waiving a right under the SRA.
Without going into the details of the ruling, suffice it to say that because the second agreement did not contain a termination clause, it remained in place and Sintel properly terminated the agreement. There was a math error by Sintel in the payments owed to Speet, but Sintel was determined to be the prevailing party because the court rejected Speet’s arguments that he was entitled to commissions for the life of the project or through April 2014, as provided in the amendment.
While this case ended up well for the principal, I frequently read about large payouts under the SRA. So, how can the principal protect itself? First, make sure the agreement is clear concerning the event that causes the sales representative to “earn” the commission and make it as far along in the process as makes sense for your business (i.e., obtaining the signed contract, shipping of the parts, payment by the customer, etc.). Also, disavow the procuring cause doctrine.
Better yet, if an employment relationship exists, create a bonus program instead of a commission program. A bonus is a fringe benefit (like vacation and sick time) under Michigan’s Wages and Fringe Benefits Act, MCL 408.471, et seq., and not wages, as a commission would be. And, like any fringe benefit, an employer doesn’t have to pay fringe benefits at termination if this is agreed to in writing.
That is why employee handbooks should say something like: “Unused vacation time will be paid out at termination in the employer’s sole discretion, in exchange for a release, and provided the employee leaves on good terms, provides a two-week written notice, and works during the notice period.” You can even place a cap on the amount paid (i.e., up to two-weeks’ time). With the discretion built in, the employer can pay it out, or not. However, I strongly recommend that the employer pay it if the employee has complied with the terms (including signing the release of claims), because if it becomes known that the employer is not acting honorably, employees will just burn through their time and perhaps resign without any notice.
But I digress…How is a bonus plan created? Glad you asked. Under the SRA, a “commission” is defined as “compensation accruing to a sales representative for payment by a principal, the rate of which is expressed as a percentage of the amount of orders or sales or as a percentage of the dollar amount of profits.”
Soon after the passage of the SRA I had my first case under it. I successfully argued, in Anusbigian v Trugreen/Chemlawn, Inc that, if the agreement does not use a “straight percentage” as the method of payment, but rather a sliding scale based on meeting a series of quotas, that it is a bonus and not a commission. Since I made that argument in federal court, it has not been used very often, or perhaps at all, but my argument was recently reaffirmed by the Michigan Court of Appeals in Heine v Mach 1 Global Services.
So, how does this work? For example, if you anticipate that a sales person may be able to sell $100,000 annually in products and you would be willing to pay 10 percent or $10, 000 for that achievement, you could promise: 7.5 percent on all sales up to $50,000, and 10 percent on all sales made between $50,000 and $90,000 and 12 percent for all sales made over $90,000. This method not only creates a bonus program (and removes the compensation from the SRA) but also encourages a sales person to really stretch and sell more products. Play with the numbers and determine how to structure the payments.
Whether it is a commission plan or a bonus plan, it must be carefully drafted to avoid legal minefields. The plan must clearly indicate not only when the commission/bonus is due, but how often it is payable (for example monthly or quarterly), when it is payable (within 10 days after the month or quarter ends), what happens if the order is cancelled or part of the order is returned, what is due when the relationship with the sales representative terminates, and whether the employer/principal is able to change the terms of the plan.
As you can see, there is a lot to be considered and the consequences of getting it wrong can be quite costly. Always consult with experienced employment counsel when you are entering into an agreement with a sales representative.