Paying pure commission can create trouble spots

Only in the clearest cases should employers try to treat a salesperson as an independent contractor

Employment issues: Robert Yeager

As most of you will know, one of the more common forms of remuneration for services performed by salespeople is pay by commission. Typically, this involves the salesperson selling something that generates revenue to the employer followed by the employer paying an agreed percentage of that revenue to the salesperson. There is nothing wrong with the arrangement in and of itself – in fact, senior salespeople with established earning patterns probably prefer such.

Historically, however, trouble spots can emerge from a pure commission arrangement. The most common trouble spots relate to the legal status of the salesperson, and the method of payment of the salesperson.

Where commission becomes the only method of calculating payment for wages to the salesperson – and where the salesperson is actually at law an employee – then the law requires that the salesperson earn a certain minimum wage in cases where commissions do not exceed the minimum wage.

It is not uncommon for both the employer and salesperson employee to agree that commission is the only method of calculating pay for wages. A logical extension of this agreement is that where the employee salesperson sells nothing, then no commissions – and therefore, no wages – are payable to the salesperson employee.

It is also not uncommon for employers and salespeople employees to devise an arrangement involving draws against commissions. This is where the employer advances what it considers a loan to the salesperson employee against anticipated future commission earnings. The purpose of the draw is to keep the salesperson employee in viable financial circumstances during slower sales times where commissions are low. The usual effect of draw systems when commissions are less than anticipated is that the salesperson employee when receiving draw goes into debt to the employer for the draws given that exceed commissions earned.

The Employment Standards Act requires that each employee be paid wages in a sum no less than minimum wage. The act also defines commissions as wages. The act does not apply to licensed real estate salespersons. The act does apply to other salespeople. In other words, if the salesperson employee puts in full-time service but earns no commission, then the salesperson employee is still owed wages that equal minimum wage.

The employer might presume it has an agreement with the salesperson employee that allows for no payment of commissions or earnings at all where there are no sales commissions earned. The employer is at great risk with this situation, however, because the act stipulates that the minimum provisions described in the act cannot be avoided.

Thus, any employment agreement for a salesperson employee that violates the minimum provisions of the act is not enforceable.

To compound the problem related to wages and commissions, often the employer instead of paying minimum wage pays a draw that it considers to be repayable as a loan from future commissions earned by the salesperson employee. Where the draw system does not incorporate minimum wages into its calculations by paying a minimum wage, and then above that issuing a draw, then the employer is in violation of the act, and there is no loan for the sum that constitutes minimum wages. In fact, the situation is precisely reversed. It is the employer that owes the salesperson employee the minimum wage amount as wages, and not the salesperson employee that owes the sum to employer as a loan.

Much turns on whether the salesperson is in fact an employee, or an independent contractor. If the person is truly an independent contractor, then the act does not regulate the payment regime, and the salesperson will not be entitled to minimum wage under the act. But the issue of whether a salesperson is employee or independent contractor is not as simple as it seems.

The problem for the employer is that, if the employer has asserted that the salesperson is an independent contractor, and even where the salesperson has agreed and there is a written agreement that says so, that still does not assure that the salesperson is in law an independent contractor and not an employee. It all turns on its own facts.

If the salesperson is at law an employee but has been treated all along as an independent contractor and paid pure commissions and draws, one can imagine the mess that awaits the employer where things get contentious. And make no mistake, employees these days have numerous devices available to them to bring the employer under pressure.

Only in the clearest cases should an employer attempt to treat a salesperson as an independent contractor.

In no case should an employer use a pure commission payment method that does not include minimum wages and the other minimum considerations of the act within it, with any salesperson where it is not clear whether that salesperson is an employee or an independent contractor.

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