Money, Money, Money, Money: Navigating Commissions as Final Wages in “The Great Resignation”
By: Colton L. Adams, Associate Attorney - Meridian Law
The employment landscape has undergone a significant shift in recent years, marked by an unprecedented surge in employee turnover. Since March 2021, over 102 million workers in the United States have quit or resigned from their employment, or an average of 4.1 million workers each month.[1] In Tennessee alone, nearly 2.5 million people have voluntarily left their jobs since March 2021, or an average of about 108,000 workers each month during this same period.[2] Amid this “Great Resignation,” employers and employees have been prompted to closely examine various aspects of the employment relationship, including the importance of understanding final wages upon termination.
To remain competitive, many employers have sought ways to attract new and retain current employees by providing additional incentives like bonus opportunities or revenue commissions. Often these compensation arrangements offer incentives for performance and may even constitute a substantial portion of an employee’s earnings, but what happens to these bonuses and commissions when the employment relationship ends?
With the Great Resignation reshaping the employment landscape, understanding the legal aspects of commissions as final wages has become even more critical. This blog post will address the legal framework governing final wage payments in Tennessee, focusing on when commissions are considered earned and when they must be included as part of an employee’s final wages. Furthermore, we will shed light on additional considerations surrounding final wage payments and guide employers and employees on best practices.
The Tennessee Wage Regulation Act
The framework for an employer’s final wage obligations is established by what is commonly referred to by local practitioners as the Tennessee Wage Regulation Act (the “Act”).[3] This legislation safeguards employee rights by setting guidelines for the payment of final wages upon termination—including the timeliness of payments, calculation methods, treatment of accrued leave, and considerations for bonuses and commissions. Within this framework, it is essential to understand the specific provisions and requirements regarding commissions as final wages.
Final Wages
The Act requires the employer to pay a leaving employee “all wages or salary earned by the employee” in full.[4] The employer must pay the employee their final wages no later than the next regular payday or within 21 days following the date of discharge or voluntary leaving—whichever is later.[5] Importantly, the Act prohibits employers from asking an employee to waive or forego payment of any already earned wages.[6]
What are “wages” under the Act?
By law, “wages” generally include any compensation due to an employee for their labor or services rendered. The Act defines “wages” as “any remuneration owed to an employee for services, including, but not limited to, commissions, bonuses, incentive program rewards, and tips.”[7] Thus, the Act clearly includes earned and vested commissions and bonuses as part of an employee’s wages.
When are wages and commissions earned?
In Tennessee, the timing of commission earnings is a crucial consideration. Although “wages” includes commissions, bonuses, and other incentives, the next question is whether such wages are owed or otherwise considered earned by the employee. Notably, the Act does not include a specific provision addressing when all wages are considered earned by an employee. Nevertheless, because an “employer-employee relationship is contractual in nature,” Tennessee law generally relies on the employment contract to determine when commissions, bonuses, and other incentive program rewards are due.[8]
Consistent with this approach, Tenn. Code Ann. § 47-50-114(b)(1) provides that “[t]he terms of the contract . . . shall determine when a commission becomes due” to a sales representative.[9] If the timing of when a commission is due cannot be determined by a contract, however, Tennessee law proscribes that the best practices between the parties controls or looks at how commissions are customarily treated and used in similar businesses across the state.[10]
In practice, employers may establish specific criteria outlining when an employee becomes eligible to receive bonuses or commissions. Often commissions are based on the occurrence of a particular event, such as the completion of a sale, receipt of payment from a customer, or the end of a quarter, but other criteria may be specified in an agreement or based on standard industry practices.
Can commissions be forfeited?
Whether employers are obligated to pay bonuses and commissions upon termination of an employee will vary based on the relevant agreements, company policies, and other specific circumstances. Employers may include conditions based on continued employment among the eligibility criteria that can determine if commissions are owed. Importantly, these conditions can result in an employee effectively forfeiting specific bonuses or commissions upon termination.
You may ask, “But wait, doesn’t Tennessee law prohibit an employer from refusing to pay earned wages?” While it is true that employers cannot avoid paying wages and commissions already earned,[11] Tennessee courts have routinely found that an employer’s “obligation to pay post-employment commissions may be limited by contract between the parties.”[12] This difference is because the contract determines when a bonus or commission is considered “earned.”
The Tennessee Court of Appeals illustrated the importance of explicitly outlining the criteria for when employees earn commissions in Winkler v. Fleetline Products, Inc.[13] In this case, an employee sued his former employer to recover post-termination commissions—that is, residual commissions after termination for work performed during the employment. The parties had a verbal agreement that the employee would procure customers for his employer and that the employer would pay a 10% commission to the employee after the customers paid the employer. Relying on the terms of the agreement which only mandated that the employee procure a customer to receive a 10% commission after customers paid employer, the Court ruled that the employee was entitled to the unpaid commissions, including commissions accruing after termination. The Court reasoned that “the parties were free to contract as they saw fit regarding residual commissions” but failed to include any terms limiting payment of the commissions on continued work.[14] Instead, because the agreement only required that the employee procure the customers to earn the commission, the employer owed commissions to the former employee each time those procured customers paid.
The Tennessee Court of Appeals again came to a similar conclusion in Westfall v. Brentwood Service Group, Inc.[15] In that case, an employment agreement provided that the employer would pay commissions for customers procured by the employee for two years. Less than two years into the employment relationship, the employee resigned. Like in Winkler, the Court found that the agreement only required the employee to procure customers, and once customers paid the employer, commissions were due to the employee for two years. “[N]owhere in the parties’ agreement is there any indication that resignation invalidates the [employer’s] obligation to pay commissions, an obligation which, as we have previously pointed out, is stated in unconditional terms in the writing before us.”[16] As a result, the Court concluded that “because there was no explicit or implicit agreement to the contrary, [employer] is obligated to pay [employee] his post-employment commissions pursuant to the unconditionally-stated language of the contract.”[17]
These cases underscore the importance of clearly defining the criteria for commission eligibility and ensuring the parties are aware of any potential forfeiture provisions or continuing obligations. Because an employee earns commissions and bonuses when a specific event or condition outlined in the employment agreement or policies occurs, the employer and employee must address these conditions on the front end. This event could be the completion of a sale, the receipt of payment from a customer, or the fulfillment of other agreed-upon conditions. Whatever the eligibility requirements may be, the employment agreement or other applicable employment policies should clearly address them. Otherwise, without an explicit contractual limitation or indication that an employee must maintain continuous employment for receipt of commissions, Tennessee law is clear: an employee is entitled to all compensation due—including wages, commissions, and other remuneration.[18]
Key Takeaways for Employers and Employees
It is crucial for both employers and employees to understand whether final wages should include bonuses and commissions. Knowing what is and is not included in an employee’s final wages can help ensure compliance with legal obligations, protect the rights and interests of the parties, and help maintain a fair and transparent working relationship. It can also mitigate potential disputes, financial hardships, and other unintended consequences.
With that in mind, the key takeaways regarding the importance of understanding how final wages are determined under Tennessee law are as follows:
· Compliance with Legal Obligations. Employers must be aware of their obligations to accurately calculate and timely pay wages, including any commissions owed to employees throughout their employment or upon their termination.
· Protection of Employee Rights. Employees have a right to receive all earned wages, including earned commissions, upon termination. Understanding eligibility conditions for bonuses and commissions can help employees to assert their rights and receive fair compensation for their work. It can also help employees to plan their finances effectively when transitioning to new employment.
· Clarity and Transparency in Employment Contracts and Policies. Clearly outlining the terms and conditions for bonuses and commissions is essential. Employers and employees can avoid misunderstandings and potential disputes by clarifying eligibility criteria. Employers should establish comprehensive policies explicitly addressing when commissions or bonuses vest and the circumstances in which the employee can forfeit the ability to earn them. Employees, in turn, can seek clarification and understand the financial implications of commission payments upon termination.
· Mitigation of Disputes and Legal Exposure. Disputes over unpaid commissions as final wages can lead to time-consuming and expensive lawsuits. It is not unheard of for employers and employees to spend as much as the bonus amount itself litigating whether or not the bonus is owed. By understanding their respective rights and obligations, employers and employees can proactively mitigate potential issues and avoid expensive litigation.
Conclusion
The Great Resignation has brought increased attention to the importance of understanding compensation structures and final wages, especially concerning commissions and bonuses. With many employees leaving their jobs, both employers and employees must navigate the legal aspects surrounding final wage obligations. As employers offer bonuses, commissions, and other incentive structures to attract and retain talent, it becomes crucial to proactively determine how they will treat these forms of compensation when the employment relationship ends.
For an employee, recognizing the importance of including earned bonuses and commissions in calculating their total compensation upon termination of their employment can significantly impact the transition between jobs.
For the employer, clearly defining the eligibility criteria, the timing of when an employee earns bonuses and commissions, and other aspects of the final wage process can protect against potential exposure and ensure compliance with Tennessee law.
Both employers and employees can navigate the termination process and protect their interests more effectively by observing when bonuses and commissions are considered “earned” and when they become part of the final wage obligations.
We’re Here to Help
Whether you are an employer addressing employment practices and compliance, or an employee interested in learning your rights, the experienced team at Meridian Law is available to discuss your rights and obligations under federal and state employment laws. Please do not hesitate to contact our team with any questions by telephone at (615) 229-7499, by email info@meridian.law, or our contact form at www.meridian.law.
Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Meridian Law, PLLC, or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.
[1] Figures taken from the U.S. Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) Reports, https://data.bls.gov/PDQWeb/jt (last accessed May 15, 2023). Between March 2021 through December 2021, approximately 41.7 million people quit their jobs; approximately 50.5 million in 2022; and the most recent data for 2023 indicates that approximately 10.4 million people quit their jobs between January 2023 and March 2023. In total, just over 102.7 million jobs have been voluntarily terminated by workers between March 2021 through March 2023. Note that this figure does not include involuntary separations, which is a substantially higher figure.
[2] Id.
[3] Tenn. Code Ann. §§ 50-2-101 et seq. For ease of reference, the statutes found in Title 50, Chapter 2, will be referred to as the “Act,” but see Hardy v. Tournament Players Club at Southwind, Inc., 513 S.W.3d 427, n. 12 (Tenn. 2017) (noting that while the statutory provisions of Tenn. Code Ann. §§ 50-2-101 et seq. are commonly referred to as the “Tennessee Wage Regulation Act,” the statutes themselves are separate and do not include such a reference).
[4] Tenn. Code Ann. § 50-2-103(g).
[5] Id.
[6] Id.
[7] Tenn. Code Ann. § 50-2-110(c)(2).
[8] Hamby v. Genesco, Inc., 627 S.W.2d 373, 375 (Tenn. Ct. App. 1981). See, e.g., Tenn. Code Ann. § 47-50-114(b).
[9] Tenn. Code Ann. § 47-50-114(b)(1).
[10] Tenn. Code Ann. § 47-50-114(b)(2).
[11] Quinnan v. Am. Hosp. Supply Corp., No. 85-195-II, 1985 WL 4076, at *4 (Tenn. Ct. App. Oct. 29, 1985) (“Ordinarily, an employee does not forfeit his right to commission already earned, by the termination of employment.”). See also Tenn. Code Ann. § 50-2-103(g).
[12] Reid v. Express Logistics, Inc., No. W2001-00236-COA-R3-CV, 2001 WL 1516980, at *3 (Tenn. Ct. App. Nov. 26, 2001).
[13] 859 S.W.2d 340 (Tenn. Ct. App. 1993).
[14] Id. at 342-43.
[15] No. E200001086COAR3CV, 2000 WL 1721659, at *1 (Tenn. Ct. App. Nov. 17, 2000).
[16] Id. at *4.
[17] Id.
[18] See Winkler v. Fleetline Products, Inc., 859 S.W.2d 340 (Tenn. Ct. App. 1993). See also Williams v. JE&T, Inc., No. 20, 1991 WL 149732, at *3 (Tenn. Ct. App. Feb. 24, 1992) (“The contract does not state that plaintiff must be an employee in order to receive commissions earned when they are paid. The contract merely states that commissions will be paid when the customer pays [employer]. Therefore, we find that plaintiff did not forfeit his commissions by virtue of leaving his employment prior to the commissions being paid.”). See also Shoffstall v. Services Group, Inc., No. 731, 1987 WL 17988, at *2 (Tenn. Ct. App. Oct. 7, 1987) (“Where a party had the opportunity to state in clear and unequivocal terms the bases for the commissions and failed to do so, the contract language is construed most strongly against the party who employed the language.”) (citing Hanover Ins. Co. v. Haney, 425 S.W.2d 590 (Tenn. 1968)).