Unpaid Sales Commission Disputes Involving Sales Representatives and Independent Wholesale Sales Representatives
Sales commissions and other performance-based bonuses are often paid to sales representatives in lieu of wages and, as a result, form an important part of the compensation package for many sales representatives, including, but not limited to, those in the real estate, automotive, financial services, brokerage, private equity, and pharmaceutical industries. Sales representatives may be engaged by a business as an employee or independent contractor. A sales representative may or may not have a written agreement outlining the terms and conditions of the relationship between the sales representative and the company. The remedies available to a sales representative who has not been paid earned commissions may vary depending on whether the sales representative is an employee or an independent contractor. The terms of any written agreement may also impact the available remedies.
Under Colorado law, employers have the same legal obligation to pay sales commissions and bonuses to employees as they do regular wages. Sales commissions and bonuses must be paid as agreed to by the employer. While employers have discretion to implement or revise a commission plan or bonus agreement, they cannot do so to cause a forfeiture of earned commissions or bonuses. In other words, employers generally cannot modify a plan to prevent an employee from receiving a sales commission or bonus that has already been earned. Generally, an employer is also prohibited from deciding not to pay an earned commission just because an employee has been terminated or has resigned from the employer.
While an employee’s right to unpaid sales commissions and bonuses requires a case-by-case legal and factual analysis, certain general rules may be applicable:
1. Absent a specific agreement to the contrary, employees who voluntarily resign before earning a commission, as defined by the employer’s commission plan, are likely not entitled to recover sales commissions after departure;
2. Employees who have been involuntarily terminated may be entitled to recover either a pro rata share of the sales commission or, in some cases, the full sales commission depending on the commission plan’s terms;
3. Vague and ambiguous sales commission plan terms generally are construed against the employer in situations where the employer drafted the plan (which is almost always the case);
4. If an employer is granted discretion to act under the terms of a sales commission or bonus plan, the employer must act in good faith because it is under a duty of good faith and fair dealing with regard to the employee.
5. An employer generally may not interpret or implement a sales commission or bonus plan in a way that causes a forfeiture of an employee’s right to an earned commission.
An employee who is denied sales commissions or bonuses has a variety of potential statutory and common law claims. Sales commissions and bonuses are considered “wages” subject to the Colorado Wage Act. As a result, an employer must pay sales commissions and bonuses to employees when such amounts are earned, vested and determinable – meaning that the employee has completed all steps identified as necessary to earn the commission, and the amount owed can be calculated. In addition, under the Colorado Wage Act, an employer generally must pay any earned, vested and determinable sales commissions or bonuses due an employee at the same time as it would have been paid had the employee had remained employed. The Colorado Wage Act sets forth stiff penalties for violations of the Act – and affords a prevailing party the right to recover attorneys’ fees and costs under certain circumstances. See Colorado Wage Act. Sales representatives and other employees may seek to recover unpaid sales commissions under other theories as well, including breach of contract, breach of duty of good faith and fair dealing, unjust enrichment, promissory estoppel, negligent misrepresentation, and intentional misrepresentation (fraud).
Independent contractor sales representatives are not covered by the Colorado Wage Act, but may utilize the other theories identified above to obtain relief. Further, sales representatives designated as “independent contractors” should keep in mind that companies often misclassify individuals as independent contractors. See Independent Contractor Misclassification. Individuals classified as independent contractors may actually be an “employee” as defined by the Colorado Wage Act and entitled to the protections and remedies afforded by that statute. This issue should be explored in an evaluation of potential claims.
Claims for sales commissions must be brought within specific time frames. As a result, any employee who believes he/she has been wrongfully denied a sales commission or bonus should immediately contact an attorney to preserve and pursue a claim to unpaid sales commissions or bonuses.
INDEPENDENT WHOLESALE SALES REPRESENTATIVES
An independent wholesale sales representative is generally defined as a sales representative who sells products and goods that will be resold in some form by the customer. Wholesale sales representatives generally have the same rights and claims as other sales representatives under Colorado law. In addition, however, Colorado has a little known law entitled the “Colorado Wholesale Sales Representative Act,” that affords wholesale sales representatives additional protections by imposing stiff penalties on companies that fail to pay them in accordance with their contractual obligations.
Finding that independent wholesale sales representatives are a key ingredient to the Colorado economy, the Colorado legislature adopted the Colorado Wholesales Sales Representative Act. The Act is intended to clarify the relationship and legal obligations between distributors, jobbers, or manufacturers and their wholesale sales representatives. First, under C.R.S. §12-66-102, a distributor, jobber, or manufacturer who is not a resident of Colorado and who enters into any written contract or written sales agreement regulated by the Act is deemed to be doing business in Colorado for purposes of personal jurisdiction. As a result, by entering into the written contract, the companies covered by the Act are submitting to the jurisdiction of the Colorado courts – even if that issue is not addressed in the contract with the sales representative. As a result, the companies can be sued in the State of Colorado – even if their only connection to the state is the contract entered into with the sales representative.
Second, and just as significantly, the Act provides that any distributor, jobber or manufacturer who knowingly fails to pay commissions as provided in any written contract or written sales agreement shall be liable to the sales representative in a civil action – not only for the amount of the commission – but also for “treble (triple) the damages proved at trial.” C.R.S. §12-66-103(1). This provision provides a significant penalty for companies that fail to meet their commission payment obligations under a written contract – and provides significant leverage to sales representatives to obtain payment on disputed commission amounts.
Third, in any action initiated by a sales representative under the Act, “the prevailing party shall be entitled to reasonable attorneys fees and costs in addition to any other recovery.” C.R.S. §12-66-103(2). While this provision presents a significant potential benefit to a sales representative, it also carries the risk that the sales representative may be liable for the company’s attorneys’ fees and costs if the sales representative does not prevail on his or her claim.
The Colorado Wholesale Sales Representative Act has been subject to very few court decisions. The United States District Court for the District of Colorado has held that a sales representative must prove the following facts to prevail on a claim under the Act: 1) the defendants are distributors, jobbers, or manufacturers; 2) who knowingly; 3) failed to pay commissions; 4) to a wholesale sales representative; 5) as provided in a written sales agreement. JDB Med. Inc., v. Sorin Group, S.P.A., 2008 U.S. Dist. LEXIS 76131 (D. Colo. 2008).
Again, as with other claims, a claim under the Wholesale Sales Representative Act is subject to a statute of limitations – that is, a time within which the claim must be brought or forever lost. As a result, any independent wholesale sales representative should immediately contact an attorney to discuss potential claims under the Act.
Finally, sales representatives employed in a state other than Colorado, or working for a company that is located in a state other than Colorado, may also have additional rights under the law of the state in which the employee or company is located as many states have enacted statutes protecting the rights of sales representatives, particularly independent contractor sales representatives.
Baird Quinn’s Colorado sales commission lawyers have substantial experience negotiating and litigating claims over unpaid sales commissions. If you require the evaluation, negotiation or litigation of an issue involving unpaid sales commissions, please contact our Denver Sales Commission lawyers for a consultation. You may obtain additional information regarding our sales commission lawyers at the following link.