Is Your Business’s Commission Policy Legal?

Many employers provide commissions to incentivize sales targets or offer performance bonuses to acknowledge the achievements of individuals or the company as a whole. Employers’ bonus alternatives may include performance-based, production, holiday, signing, relocation, or retention bonuses. But what happens when your employees aren’t performing how you hoped they would or leave before a retention period ends? Can they keep the incentive money you’ve already given them, or can you withhold or pull back the incentives? Managing your business’ motivations requires understanding the types of payments that can legally be withheld or pulled back. Additionally, your business must be able to recognize when payments become so vested that they can no longer be pulled back. Your right to withhold commission depends on whether incentive payments are “earned wages” per state law.

Under Ind. Code § 22-2-5-1, wages must be paid within ten (10) business days of a pay period, and the employee can never waive wages earned—additionally, Ind. Code 22-2-5-2 (The Indiana Wage Payment Statute) states an employer who withholds or attempts to claw back earned “wages” might find itself liable for the wages, plus double damages and attorney fees under the Indiana Wage Payment Statute. When an employer agrees to provide compensation for services, an employee’s right to compensation vests when the employee renders that service. Under the Indiana Wage Payment Statute, a bonus is a wage if the bonus directly relates to the time an employee works, is paid regularly, and is not dictated by the employer’s financial success. Simply put, wages are compensation for work, while other payments depend on external factors like customer payments, profitability, or department productivity.

To determine whether an employer’s promised payments are wages, Indiana courts will generally ask if the payment is linked to a contingency outside the employee’s control; does the pay relate directly to the employee’s work; are the wages paid regularly for work done by the employee; and is the compensation the only form of pay? If a payment is linked to a contingency, it’s generally not subject to the statute. If the payment relates to the employee’s work, it’s likely wages. Regular, periodic payments for work the employee does are also likely wages. If the payment is the only form of compensation, it’s more likely to be deemed wages. For payments that are not earned wages, employers can draft language that reserves the right to withhold or take back payments from employees who leave their company before payment has vested or otherwise do not uphold their end of the bargain.

Employers should draft clear and understandable language for their employees to understand how their business bonus or commission policy works. If you are looking to hire a lawyer to help you draft your business’s commission policy or otherwise walk you through how Indiana Wage Laws affect your business, contact McNeelyLaw today. Our experienced team of Indiana employment and business attorneys can assist you with all your business’s needs.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.