Disputes Over Unpaid Commissions and Bonuses With Departing Employees

Commissions are wages, but the plan decides when they are earned

The Texas Payday Law, Labor Code chapter 61, defines wages to include compensation for services computed on a commission basis, and it adds that vacation pay, sick leave pay and severance pay count as wages when a written agreement or written policy promises them. Section 61.015 then says the operative thing for this dispute: wages paid on commission, and bonuses, are due according to the terms of the agreement between the employee and the employer.

That sentence cuts both ways. If the plan says a commission is earned when the customer pays and the salesperson is still employed on that date, the Texas Workforce Commission will generally read the plan as written. If the plan is silent, ambiguous or never put in writing, the employee's version of the deal gets a hearing, and the company is defending a wage claim with no document on its side.

Three questions decide most of these disputes:

1. When is a commission earned? On booking, on invoicing, on shipment, on collection, or on some combination. Plans that say “paid on collection” without saying when the commission is earned invite an argument that it was earned at the sale and payment was merely deferred.
2. What happens to deals in the pipeline at departure? A clause that the employee must be employed on the payment date to receive a commission is common and generally enforced when it is clear. Without it, the employee will claim every deal he or she originated.
3. Is the bonus discretionary or earned? A bonus the plan ties to measurable targets, with no reservation of discretion, is a promise. A bonus described as discretionary, in the company's sole judgment, is usually not owed until the company decides to pay it.

What a departing employee is owed, and when

Section 61.014 sets the timing. An employee who is discharged must be paid in full not later than the sixth day after discharge. An employee who leaves for any other reason, including resignation, must be paid in full by the next regularly scheduled payday. “In full” means every commission and bonus that was earned and due under the plan as of that date.

Commissions that have been earned but are not yet payable under the plan, for instance because the customer has not paid, are not late on day six. They become due when the plan says they do, and the company should keep paying them on the plan's schedule after the employee is gone. Stopping those payments because the person left is the single most common way an employer turns a clean departure into a wage claim.

Where the former employee can take the claim

The employee has two paths, and a lawyer representing the employee will pick the one that fits the amount and the facts.

A wage claim with the Texas Workforce Commission. Under section 61.051 the claim must be filed within 180 days after the wages became due, and the statute makes that deadline jurisdictional. An agency examiner investigates and issues a preliminary wage determination order; either side can appeal it within 21 days to a wage claim appeal tribunal, and the process can continue to the Commission and then to court. If the examiner, the tribunal or the Commission finds that the employer acted in bad faith in not paying, it can add an administrative penalty of up to the lesser of the wages in question or $1,000. The process is described in detail in what employers need to know about Texas Payday Law claims.

A lawsuit for breach of contract. The commission plan is a contract, written or oral, and an employee can sue on it in state court instead of, or in some circumstances after, the agency route. A suit for debt or breach of contract carries a four-year limitations period under Civil Practice and Remedies Code section 16.004, so the 180-day agency deadline does not end the exposure. Whether an unwritten plan is enforceable at all is covered in whether a verbal business agreement is enforceable in Texas.

Independent sales representatives: a different statute, triple damages

If the person was not an employee but an independent contractor who solicited wholesale orders for the company's product, the Payday Law does not apply, because it excludes independent contractors. A separate statute does. Business and Commerce Code chapter 54 requires a contract between a principal and a sales representative who solicits wholesale orders in Texas to be in writing or in a computer-based medium and to state how the commission is computed and paid. If the agreement does not comply and is terminated, the principal must pay all commissions due within 30 working days. A principal that fails to comply with a compliant contract's payment terms, or misses that 30-day deadline, is liable for three times the unpaid commission plus reasonable attorney's fees and costs. The chapter cannot be waived, and a clause placing venue in another state is void.

The statute reaches manufacturers, producers, importers and distributors of a product that use commissioned independent representatives for wholesale sales. It does not reach service businesses or retail sales. Companies that mix employees and independent reps on the same sales team should know which group each person falls in before a dispute starts, because the exposure differs by a factor of three.

What the former employee will argue

• The deal was earned before I left. The procuring-cause argument: the salesperson did the work that produced the sale, so the commission vested at the sale and the payment-date clause is an unenforceable forfeiture. Clear plan language defeats this; silence feeds it.
• The plan is ambiguous, so read it my way. Texas construes an ambiguous contract against the party who drafted it, and the employer nearly always drafted the plan.
• The bonus was not really discretionary. Years of paying the same formula-driven bonus, emails announcing it, or an offer letter stating a target amount can turn a nominally discretionary bonus into a promise.
• The company changed the plan mid-year. A unilateral change to the commission rate or territory can be enforced only prospectively, and only if the employee had notice and kept working. Deals already closed under the old plan stay under the old plan.
• The company fired me to avoid paying. A termination shortly before a large commission vested will be presented as bad faith, which matters for the Payday Law penalty and for the jury's view of the contract claim.

Example

Suppose a Dallas software reseller pays its account executives 8 percent of first-year contract value, “payable in the month the customer's first payment is received.” The plan, which each executive signs, says a commission is earned only if the executive is employed on the date the customer's payment is received. An executive resigns on March 10 after closing a large contract on February 28; the customer pays on April 2. She also demands her annual bonus, which the plan describes as “discretionary, based on overall company performance.”

Under the signed plan, the commission on the February deal was not earned, because she was not employed on April 2, and the bonus was never promised. The company's position is strong on both. It weakens if the company has, in the past, paid departing executives on deals that closed before they left, or if a manager emailed her that the bonus was “locked in” for the year. Her final paycheck for salary and any commissions on deals the customer paid before March 10 was due on the next regular payday after her resignation, and nothing could be deducted from it without her written authorization.

Evidence the company should gather now

• Every version of the commission plan the employee worked under, with the signature page or electronic acknowledgment for each.
• The offer letter and any email or message in which a manager described the commission or bonus terms.
• The deal ledger for the employee's accounts: booking dates, invoice dates, payment dates and the commission paid on each.
• How the company handled the last several departures under the same plan. Inconsistent treatment is the employee's second-best evidence.
• The final paycheck calculation, with any deductions and the written authorization for each.

When to involve a litigator

A commission dispute involving one employee and a clear, signed plan is usually resolved with a short letter that quotes the plan and attaches the payment ledger. The cases that need a litigator early are the ones with an unwritten or ambiguous plan, a mid-year change, an independent sales representative, several departures in a row under the same terms, or an employee whose demand letter also mentions discrimination or retaliation. In those, the commission claim is one count among several, and how the company answers it shapes the rest. The broader picture when an executive leaves in a dispute is covered in the company's options when an executive breaches an employment agreement. Tina Wysk represents employers in compensation and departure disputes in Dallas state and federal courts.