Enforceability of wage forfeiture in commission agreements

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A security service company hired an employee to solicit new business from new and existing clients. His compensation was $50,000 and one percent of his acquired contract’s net revenue per year. He was entitled to monthly commission payments without having to do any further work for that account. The company’s Sales Incentive Plan states that upon termination of his employment—barring retirement, death, or disability—all commissions cease and he would forfeit his right to any fee that had not been charged at the time that he left the company.

The employee, who was terminated without cause in 2008, had the understanding that the above provision in the sales plan meant that he did not have the right to any commissions on fees accrued after his termination. However, he sued the defendant and argued that the termination of his commissions constitutes a forfeiture of wages, an idea that is strongly opposed by Connecticut courts.

A forfeiture of commissions might be justified to discourage employees from voluntarily leaving or doing something that could lead to termination for cause. If a salesperson’s job involved more services than just acquiring clients, the employer could argue that a commission was not earned because obligations were not completed. But both parties in the security company’s case acknowledged that the plaintiff was terminated without cause and that his right to commissions was not contingent on any further service to clients.

The law of contracts maintains that both parties are bound by contractual provisions to which they have both agreed to. However, this principle of strict compliance when in reference to forfeiture of wages is not necessarily enforceable. The implied covenant of good faith and fair dealing is the general idea that parties to a contract will deal fairly, honestly, and in good faith so as not to sabotage the right to access benefits of that contract.

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The court, in the aforementioned case, was faced with these two conflicting issues in contract law: decide in favor of the rule that a contract should be strictly enforced as written, or decide in favor of the public policy against forfeiture of compensation. The court held in favor of the plaintiff and decided that the provision in the company’s contract, which denied the employee his commissions, was unenforceable because it violates public policies that oppose forfeitures and strongly supports the payment of earned compensation.

Another Connecticut court in Butler v. Hartford Technical Institute imposed liability on a defendant for double the amount of wages after the plaintiff attempted to recover unpaid overtime wages. The court cited a Connecticut law, CGS § 31-72, that states “when an employer fails to pay an employee wages…such employee….may recover, in a civil action, twice the full amount of such wages…” because it “provides penalties in order to deter employers from deferring wage payments once they have accrued.” Because this law is remedial, it must be given a broad interpretation in favor of those that the law intended to benefit– the employees.

So remember, employees have strong protections if an employer tries to deprive them of earned compensation.

Posted March 4, 2013

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