In turbulent times, we are going to see higher turnover and layoffs – even in sales. A big issue for departing sales employees is entitlements to commissions.
We often see employment contracts that poorly define the conditions related to treatment of commissions after an employee departs (typically referred to as “trailing commissions”). For example, when someone’s employment is terminated by either party, they may have unpaid commissions and often leave developed sales opportunities that ultimately close after their departure. Are they entitled to any commission on a deal that was highly matured and closed after they depart?
A typical sales comp plan involves a large variable/commission component, so this can be a big issue, particularly when an the departing employee feels they are entitled to additional compensation and the financial amount is worth fighting over.
It is in the employer’s best interests to be proactive and ensure everything is clearly defined in advance, since the courts that are generally sympathetic to the employee in disputes.
While the rules are slightly different depending on which state or provincial laws govern the employment and which party terminates the employment, there are some general rules.
Almost all jurisdictions, consider commissions earned prior to departure as earned income due to the employee regardless of any other circumstances (even if it says otherwise in the contract).
In the absence of conditions in the compensation plan or employment agreement, many courts have awarded pro-rata calculations of commissions or bonuses.
You can avoid costly disputes if detail the how you will pay out commissions after departure.
For employers this means, that if the employee departs on their own will, they forfeit entitlement to commissions associated with any maturing opportunity.
If the employee is terminated, particularly without cause, you may want to consider paying a pro-rated amount based on past performance.
Whatever your company’s policy, we suggest it is fair to both parties, clearly defined and is consistent with the local employment laws governing the employee-employer relationship.
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Eliot Burdett
Eliot received his B. Comm. from Carleton University and has been honored as a Top 40 Under 40 Award winner.
He co-authored Sales Recruiting 2.0, How to Find Top Performing Sales People, Fast and provides regular insights on sales team management and hiring on the Peak Sales Recruiting Blog.
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