When Are Sales Commissions “Earned” And Not Subject To Forfeiture under the Colorado Wage Act?
The Colorado Wage Act and Colorado Minimum Wage Order define wages or compensation as “all amounts for labor or services performed by employees, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method.” However, “[n]o amount is considered to be wages or compensation until such amount is earned, vested and determinable.” See C.R.S. § 8-4-101. Commissions are deemed wages or compensation when earned for labor or services in accordance with the terms of any agreement between an employer and employee. See C.R.S. § 8-4-101(14)(a)(II)(emphasis added).
The question, therefore, is when are sales commissions deemed to be “earned in accordance with the terms of an agreement between an employer and employee,” thus triggering an obligation to pay under the Colorado Wage Act? While many questions remain unanswered, the Colorado courts have provided some guidance on this issue.
One such court decision is Barnes v. Van Schaak Mortg., 787 P.2d 207 (Colo. App. 1990). In that case, Mr. Barnes, a loan originator, sued his employer for failing to pay him origination fees for loans he originated that closed after his employment ended. The applicable employment agreement provided that Mr. Barnes would “not receive origination fees for loans, whether approved or not, which close subsequent to the last day of the month in which termination occurs.” Mr. Barnes was terminated on June 24, 1986. His employer refused to pay him origination fees on loans he originated before his termination but which closed after June 30, 1986.
The Trial Court ruled in Mr. Barnes’ favor, holding that the quoted provisions of the employment agreement violated C.R.S § 8-4-125 of the Wage Claim Act. It reasoned that since the Wage Act confers upon employees the right to earned and unpaid compensation, an agreement purporting to forfeit such rights is unenforceable. Alternatively, the court determined that the contractual provisions for forfeiture of commissions are ambiguous and are unenforceable for that reason.
The Colorado Court of Appeals reversed the trial court’s decision. First, the Court of Appeals held that that the employment agreement stated in clear and unequivocal language that Mr. Barnes would not be entitled to receive loan origination fees on loan applications that did not result in loan closings within the month when his employment terminated.
Second, the Court of Appeals held that the agreement did not cause Mr. Barnes to forfeit “earned” compensation in violation of the Wage Act. Compensation is earned under the Wage Act only if it is vested pursuant to an employment agreement. As applied in Barnes, the Court held that the compensation was not vested because the parties’ employment agreement expressly and unequivocally provided that Mr. Barnes was entitled to loan origination fees only if the loan closed before or during the month in which his employment terminated – which had not occurred for the loans at issue. As a result, the loan origination fees were not vested – and therefore not earned – according to the parties’ agreement. As the compensation was not earned, the employment agreement did not require Mr. Barnes to waive or modify his right to earned compensation under the Wage Act. As a result, the Court held that the employment agreement did not violate the Wage Act by causing a forfeiture of earned compensation.
Another decision addressing the issue is Hallmon v. Advance Auto Parts, Inc., 921 F. Supp. 2d 1110 (D. Colo. 2013). In Hallmon, the employer had a policy on bonuses stating “that employees ‘must be an active Team Member at time of payout’ to receive bonuses after termination.” Relying on this language, the employer refused to pay Mr. Hallmon his bonus for the last two periods of his employment because he was not an active Team Member at the time of payout (he was terminated one day before the payout date). Citing Barnes, the employer argued that the policy defined when the bonuses were earned and vested and, therefore, the employee was not entitled to payment. The court disagreed, distinguishing the Barnes decision:
“In Barnes, the employment agreement provided that the plaintiff was entitled to bonus commissions only when … applications he generated during his employment resulted in a loan closure in the month during which he was terminated. In that sense, the employment agreement effectively defined the “vesting” of his bonuses under the CWCA–i.e., his bonuses vested only once the applications resulted in a loan closure before or during the month of termination. The “Frequently Asked Questions” provided by Advance, however, does not redefine when Mr. Hallmon has earned his bonuses or when they have vested. Rather, it provides a condition for the payment of bonuses that otherwise have already vested and are already determinable within the meaning of the CWCA. Adopting Advance’s argument would allow employers to manipulate similar contractual language to avoid paying rightful wages to employees by conveniently terminating them shortly before their payday, contravening the public policy behind the CWCA. See C.R.S. § 8-4-121(agreements waiving or modifying employee’s rights in violation of the CWCA is void).”
With their different outcomes, how can Barnes and Hallmon be reconciled? Both decisions confirm that commissions (or other incentive compensation) are vested and determinable, and subject to the Wage Act, only when they are earned under the terms of an employment agreement between an employer and employee. The cases had different outcomes, however, because the employment agreement in Barnes and the written employment policy in Hallmon had different language on the issue of when the compensation was deemed earned. In Barnes, the employment agreement was found to clearly provide that Mr. Barnes would not be paid origination fees on loans that closed after his last month of employment. As a result, any loan origination fees on loans closing after his last month of employment could not be deemed earned under the Wage Act. In Hallmon, the applicable language was much less clear and was interpreted not to define when the commission was earned, but to define when a payment of an earned commission could be received (a “condition of payment” only). This, the Court concluded, caused an improper forfeiture of an earned commission in violation of the Wage Act. These cases make clear that the focal point for determining whether compensation is earned must be the language of the employment agreement. An agreement that specifically and clearly defines when compensation is earned will be followed by a court in making that determination.