Consider this scenario: Employee A has worked in sales for Employer B for many years.  In addition to a small salary, Employee A gets a 4% commission on all sales.  On July 1, Employee A’s employment ends, either because Employee A quits or Employer B fires Employee A.  There are pending commissions from May and June, and Employee A expects to be paid.  Is Employer B obligated to pay those commissions?

If there is a written agreement between the employer and the employee that specifies whether the employee is entitled to be paid commissions after leaving the company, then the written agreement will control.  If that is the case, then the issue is simple.

However, it is common for commission arrangements to be oral, and it is also common for written agreements to omit any discussion about payment of commissions to a departed employee.  What are the rights of the employee and the employer in that situation?

The answer is more complex and uncertain than might be expected.  The general principles are as follows: 

1, If the commission has been earned as of the date of separation, the employer is obligated to pay it unless there is an agreement to the contrary.

2. If the commission has not yet been earned as of the date of separation, the matter is determined by the past routine or practice of the employer.

3. The employer may be able to avoid paying the commission if it fired the employee for cause.

The starting point is the Texas Payday Law, which is part of the Texas Labor Code.  Section 61.015 of the Code contains some general language that offers little concrete guidance: 

(a)  Wages paid on commission and bonuses are due according to the terms of:

(1)  an agreement between the employee and employer;  or

(2)  an applicable collective bargaining agreement.

(b)  An employer shall pay wages paid on commission and bonuses to an employee in a timely manner as required for the payment of other wages under this chapter.

The TWC has issued a regulation to expand on the statutory language and provide some better guidance.  The regulation provides that “earned” commissions must be paid to a departed employee:

(a) For purposes of §61.015 of the Act:

(1) Commissions or bonuses are earned when the employee has met all the required conditions set forth in the applicable agreement with the employer. To change an agreement, there must be prior notice as to the nature and effective date of the changes. Changes to written agreements shall be in writing.

(2) Commissions or bonuses are due to be paid, in a timely manner, according to the terms specified in an agreement between an employer and an employee. The terms should specify the time intervals or circumstances (or combinations thereof) that would cause commissions or bonuses to become payable, such as, but not limited to, weekly, monthly, quarterly, when sales transactions are recorded, upon buyer's remittance, etc.

(b) Unless otherwise agreed, the employer shall pay, after separation, commissions or bonuses earned as of the time of separation.

(c) Commissions or bonuses due after separation from employment are payable based on the routine or practice specified in the agreement when the employee was employed, or on any special agreement made between the employee and the employer upon separation.

(d) Draws against commissions or bonuses may be recovered from the current or any subsequent pay period until fully reconciled.

While this provides some guidance, it should be apparent that the rights of the parties will remain uncertain if there is no express agreement.  In particular, there could be a dispute as to (1) whether a particular commission has been “earned,” because the “required conditions” for payment of the commission may be disputed; and (2) whether there was an “agreement” that other commissions would or would not be paid after separation.  If there was no discussion of the subject at all, the key factor will be the custom and practice of the employer.  As the TWC explains on its website, “Commission pay agreements are enforceable whether they are oral or in writing, and agreements can be established with a showing of a pattern or practice of paying commissions in a certain way.”

Only a few reported Texas cases discuss this issue.  However, those decisions recognize an additional component of the analysis: whether the employee was fired for cause.  The leading Texas case is Metal Structures Corp. v. Bigham, 347 S.W.2d 270 (Tex. Civ. App. – Dallas 1961, writ ref’d n.r.e.).  In that case, the plaintiff was a salesman for the employer.  He claimed to be the procuring cause of a contract, but he was fired before he completed the sale.  The court rejected the argument that the termination cut off the employee’s right to a commission, noting that the employer had no valid reason to terminate the employee:

Neither can we say that the fact that the appellee was discharged by appellant corporation prior to the time he completed the sale would bar him from his right of recovery. There is no evidence that appellee was discharged for any valid reason other than appellant wanted to get someone else to do sales work. While an agency may be revoked by the principal at any time, the revocation of the agency cannot be made the means of defeating the right of the agent to commissions already earned.

By implication, however, the result would have been different if the employer had fired the employee for cause.  Although the court did not consider the issue, its reasoning at least raises the possibility that a voluntary resignation by the employee could affect the employer's obligation to pay commissions.

It should be noted that Metal Structures was decided 30 years before the passage of the current version of the Texas Payday Law and long before the issuance of the regulation quoted above.  It is not clear whether the Metal Structures is still good law.  This adds yet another layer of uncertainty to any analysis of unpaid commissions.

In sum, the uncertainty of these legal rules should make it obvious that a written agreement is in the best interests of everyone, especially the employer.  In the absence of a written agreement, however, the key questions will be: 

1. Has the commission been earned?

2. What has been the custom and practice of the employer when commissioned employees left in the past?

3. Did the employer have good cause to terminate the employee?

 David C. Holmes is a Houston employment lawyer with The Law Offices of David C. Holmes