COLORADO DIVISION OF LABOR ISSUES NEW INTPRETIVE NOTICE & FORMAL OPINION ON COMMISSIONS AND BONUSES UNDER THE COLORADO WAGE ACT
On June 24, 2022, the Colorado Division of Labor Standards and Statistics (“CDOL”) issued Interpretive Notice & Formal Opinion # 17, addressing the payment of commissions and bonuses under the Colorado Wage Act (“Interpretive Guidance.”).
Do commissions and bonuses count as wages?
Under the Colorado Wage Act, commissions and bonuses are “wages” or “compensation.” An employer must pay commissions and bonuses earned for labor or service performed in accordance with the terms of an agreement between an employer and employee. To be entitled to a commission or bonus, an employee must show three elements – (1) that the commission or bonus was “earned,” (2) that it was earned “in accordance with the terms of an agreement,” and (3) that the amount owed is “determinable.”
In the Interpretive guidance, the CDOL defined these concepts as follows:
- Earned: that the employee did the work they had to do, in exchange for the promised wages.
- In accordance with the Terms of the Agreement: that, if the parties agreed in advance that the employer wouldn’t have to pay the wages until certain conditions were met, those conditions were met.
- Determinable: that the dollar amount of the wages can be calculated.
What is considered an earned commission?
Under the Colorado Wage Act, employers and employees generally are free to decide when an employee is deemed to have “earned” a bonus or commission. According to the CDOL, unless an employer and employee agree to different terms, a salesperson is deemed to have earned a commission upon making a sale.
The Interpretive Guidance provides several examples to help illustrate when sales commissions and bonuses are deemed owed:
- An employer and employee agree that, to earn a commission, a sales representative must make a sale and collect payment from the customer. If the sales representative makes a sale but then leaves employment without collecting payment from the customer, the employee has not earned the sales commission in accordance with the terms of the Agreement. Therefore, no commission is owed.
- An employer promises an employee a “generous” year-end bonus, without any further clarification. The employer then refuses to pay a year-end bonus. The employer does not owe the bonus to the employee because the dollar amount of the bonus is not “determinable.”
- A roofing company offers an employee a commission of 50% of the projected revenue from each project sold, after a fixed overhead cost of 20% of the job’s sales price is deducted, without regard to the actual costs of the project. The employer later refuses to pay a commission to the employee due to unanticipated project costs leading to a loss of profitability on the project. Here, a commission would be due to the employee because the employee earned a commission by making a sale, the commission is owed “in accordance with the terms of the Agreement” because the parties’ agreement involved a specific formula that did not identify actual, real-world profitability as a condition for payment, and the amount sought can be calculated and is therefore determinable. Therefore, even if the project was not profitable, a commission is owed.
When does a company have to pay out commission?
The Interpretive Guidance also addresses conditions to payment of commissions and bonuses, and how an employee’s separation from employment may affect an employee’s right to payment. Employers and employees can agree in advance that the employer doesn’t have to pay a commission or bonus unless certain conditions are met. The Colorado Wage Act, however, “nullifies any effort to circumvent its requirements by contract.” According to the CDOL, the employer crosses the line if a condition effectively allows an employer to circumvent its duty to pay owed wages to employees. As explained by the CDOL,
If an employee leaves the job or is fired, the employer must pay them commissions or bonuses, so long as the employee did the required work, any agreed-upon and valid conditions for payment are met, and the wages can be calculated. The last two things could happen after the employee is gone. Employers can’t get around that rule by relying on invalid agreement terms, such as terms saying that they don’t have to pay the wages, or that seem to define how employees earn wages, but in reality just punish employees for quitting or being fired.
According to the CDOL, in the absence of an agreement on whether an employee is entitled to receive commission on post-termination sales, the general rule is that an employee is entitled to a commission if his or her efforts were responsible for a sale.
An example cited by the CDOL is from a US District Court case, Hallmon v. Advance Auto Parts. In that case, the employer’s policy stipulated that an employee “must be an active Team member at the time of payout” to receive a bonus. Importantly, the employer policy did not speak to what the employee needed to do to earn the bonus, only the conditions for payment of the bonus. The employer fired an employee the day before it paid out the bonus and then refused to pay the bonus, even though the employer confirmed that the employee would have received the bonus had he remained employed. In these circumstances, and consistent with the outcome in the Hallmon case, the CDOL concluded that the bonus was “earned” because the employee would have received the bonus but for the fact that the employee was no longer employed (and nothing in the parties’ agreement specifically addressed when the bonus was earned). The CDOL also stated that the bonus was “owed in accordance with the Terms of Agreement” because the policy did not define valid conditions for paying bonuses.” Instead, “it just said the employer wouldn’t pay already-earned bonuses to employees who had a right to them.” Quoting form Hallmon, the CDOL also agreed that “the law doesn’t allow employers to manipulate … contractual language to avoid paying rightful wages to employees by conveniently terminating them shortly before their payday.”
The Interpretive Guidance also addresses the question of whether commissions payable after employment ends (for example, payable upon receipt of payment from a customer) are wages subject to the Colorado Wage Act (and the Act’s penalties for non-payment). The Answer is yes. In Example #10, the CDOL set forth a scenario in which an employee is to be paid a 5% commission on each sold job, payable within a week of receipt of customer payment. In the scenario, the employee quit and subsequently jobs sold by the employee were paid by customers to the employer. The employer refused to pay the commissions and the employee issued a written demand for payment. The CDOL concluded that the commissions on those jobs were owed to the employee pursuant to the Wage Act because the commissions were earned, owed under the terms of the parties’ agreement and were determinable (even though the possibility existed that the customer would not make payment after employee’s employment ended). In the administrative case cited with approval by CDOL with this Example #10 (Peak Building Solutions, Inc.), penalties were found to be owed under the Wage Act to the employee because the employee sent the employer a written demand after the customer paid for the jobs, and the employer still refused to pay the commissions.
The new Interpretive Guidance provides helpful guidance to employers and employees in determining when commissions and bonuses are owed under the Colorado Wage Act. It does, and cannot, address all potential scenarios or answer all questions. Bonus and commission cases are fact intensive and require individual analysis. Baird Quinn’s employment attorneys have significant experience with Colorado employment laws and in representing clients in bonus and commission cases and are available to help you navigate this complex area of the law.