“Sales compensation plans: are there limits on when and how they can be changed?”

Question: The sales compensation package for my company says that the company has the right to amend, change, or cancel the sales compensation plan at any time – except where prohibited by law. 

Well, what are those prohibitions, if any? 

They are taking away my biggest sale and saying they are not paying full commissions on it because it was too big.

Christian
Miami, Florida

Answer: Dear Christian: I cannot answer all of the many questions that are submitted to me. So, what I generally do is answer those questions that I think will apply and appeal to the most blog visitors. Yours is surely one of those, as so many people who work on commission – either partly or entirely – have the same question that you do. It’s a bit complicated, but let me do my best to simplify and clarify it for you:    

1. As a general rule, both employers and employees are free to say to each other, at any time, “Starting tomorrow (or next week, next month, or next year), the terms on which we will work together with you are going to change, or we must part ways.” It’s just like a restaurant and its patrons: the restaurant can raise or lower its prices, or change its menu, any time it wants to, and then customers can say to themselves, “Too expensive,” or “Too little food on the plate,” etc., and decide whether or not to come in to be a customer again for a meal. That basic freedom is given to all employers and all employees who have not signed binding contracts that say otherwise.

2. A compensation “plan” is a kind of contract, presented by the employer to the employee, that says, in effect “These are the compensation (or commission) terms we offer to you.” A compensation plan is a contract about one thing: compensation. It is like the price list on the restaurant’s menu. Most compensation plans say either “These terms can be changed at any time” or “These terms will not change for one year.” Either way, that sets the boundaries of behavior: If the  plan says it cannot be modified for one year, then it can’t be modified for one year.

3. There are many times and many ways that an employer is prohibited by law from changing the terms of its Comp Plan. Here are just a few examples: (a) when the employer has said, “We will not change these terms during this calendar year,” then it cannot do what it promised it won’t do, as that would violate a contractual promise; (b) when the employer has said, “We will not change the percentage commission earned by more than 5%,” then it cannot change the percentage commission earned by more than 5%, as that would violate a contractual promise; (c) the employer cannot lower the hourly rate of pay below the federal or state minimum hourly wage, as that would violate a law passed by state legislatures and the federal Congress; (d) the employer cannot say, “Men make 5% commission, but women make 10% commission,” as that would violate state and federal discrimination laws. These are just a few examples out of the many, many other prohibitions that exist.

4. One way that employers change their compensation plans that gets employees the most upset: “retroactively.” Often employers don’t get around to changing, say, their 2012 compensation or commission plans until March of 2012. So, which compensation or commission plan applies to January and February of that year? The 2011 plan? The 2012 plan? A mixture of both? Chances are that employees who are negatively affected by the changes in the plan from 2011 to 2012, that is who are thus shortchanged, will feel cheated, because they labored during January and February under the then-only terms known to them: the 2011 plan. This happens far more frequently than you’d imagine.

The law says that you can’t change the terms of compensation retroactively, that is, you can’t tell someone in March that, effective two months previously, in January, his or her commission rate is lowered, or does not apply to certain customers, or territories or products, after those customers, territories and products were sold. That is like changing the speed limit on a highway from 65 to 55 on March 1st, and sending out speeding tickets to people who drove their cars 60 miles an hour on February 5th. That kind of retroactive change would constitute a breach of a contractual promise, and thus is prohibited by law, though many employers do just that.    

5. Another way that employers change compensation plans that also gets employees (and, it seems you) upset: in “mid-sales-stream.” Let’s go back to the restaurant analogy: Suppose you sit down in a restaurant, and look at the menu. The price for a hamburger listed on the menu is $5.00. You order the hamburger, the waiter or waitress brings you the hamburger, and you eat three-quarters of it. Right then, in “mid-bite,” the waiter or waitress comes to your table and says to you, “We just changed the price of the hamburger to $27, and that is the price you will have to pay.”

You would likely say, “But wait a minute: when I ordered the hamburger, it was $5. When you brought the hamburger, it was $5. When I ate ¾ of the hamburger, it was $5. Now, at this time, when I am almost done with the hamburger, you announce that it costs $27? No way!”

That’s what employers sometimes try to do: after you have found the customer, made the sales pitch, and made the sale, after the goods have been shipped, and maybe after even the goods have been delivered, you are then advised that “We have lowered the commission percentage from 18% to 1% of the sales price.”

So, what is fair and right in this regard? These “mid-stream” changes in compensation (or commission) plans are always upsetting, and not easy to address in legal terms, for the reasons explained in the next section.

6. When is a commission earned? That depends on (a) any agreement then in force, or, if none is, then (b) on the law of your state. Most states have their own laws that say, in effect, “If you have an agreement that says when a commission is earned, then it is binding; when you don’t have one, then the law says . . . ”. However, “what the law says” varies from state to state, and may even vary depending on what kind of sales you may engage in, that is, car sales, real estate sales, or sales of services. I can see that you have written in from Florida, but I don’t know what kind of sales you engage in, so I can’t look up the answer for you. To find that out, I suggest you review the website of the Florida Department of Economic Opportunity, or call them in Tallahassee at (850) 245-7105.   

Christian, I admit this was a rather lengthy answer to a rather brief question, but it is the best – and briefest – I could do. I sure do hope it helps you, and others, as well. And thanks for writing in.     

My best to you,
Al Sklover

P.S.: How about a Model Letter to Request Monies Owed, but Not Yet Paid to You, by Your Present Employer? To obtain a copy, just [click here.]  

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