If a Pennsylvania employer’s sales commission plan is unclear when the commission is “earned,” the employer may be on the hook for paying commissions to a terminated salesperson — even if the plan requires employment at the time of payment to receive the commissions.

If a Pennsylvania employer’s sales commission plan is unclear when the commission is “earned,” the employer may be on the hook for paying commissions to a terminated salesperson — even if the plan requires employment at the time of payment to receive the commissions.

That’s the surprising holding in O’Donnell v. Passport Health Communications, Inc., decided earlier this year by Chief Judge Petrese Tucker of the U.S. District Court for the Eastern District of Pennsylvania.

Pennsylvania’s Wage Payment and Collection Law does not create any substantive rights to compensation; rather it provides an avenue for an employee to enforce his or her right to be paid wages earned, per an agreement with the employer.

In O’Donnell, Passport Health’s sales commission plan provided sales commissions for the fourth quarter of 2010 were not paid out until February of 2011, and required the employee “must be employed at the time of payment to receive commissions.” The court noted, however, the plan did not make clear when the commissions were “earned,” which is vitally important under the Wage Payment and Collection Law. That statute provides that “Whenever an employer separates an employe[e] from the payroll, or whenever an employe[e] quits or resigns his employment, the wages or compensation earned shall become due and payable not later than the next regular payday of his employer on which such wages would otherwise be due and payable” (emphasis added).

The court held that, because the plan did not specify when the commissions were “earned,” a reasonable jury could find that the commissions were earned at some point prior to termination (i.e., by the end of the fourth quarter), and to fail to pay the commissions upon termination would be an unlawful “forfeiture,” despite the plan language indicating the employee had to be employed at the time of “payment” to receive the commission.

Action item: As a result of this decision, Pennsylvania employers should review their sales commission or bonus plans, and ensure the plan language clearly states commissions or bonuses are not “earned” until the time of payment, if that is the employer’s intent, and consider adding a statement explaining the rationale for such a rule (such as continuing the client relationship and servicing the sale).

Michael Homans is a Labor & Employment attorney and Chair of the Litigation Department at Flaster Greenberg PC. For more employment law updates, including news and links to important information pertaining to legal developments that may affect your business, subscribe to Michael’s blog, or follow him on Twitter @EmployLawUpdate.

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