Businesses who employ commissioned sales representatives may need to reevaluate their policies for paying commissions, following a recent decision from a federal appeals court in Chicago.
This summer, a three-judge panel of the U.S. Seventh Circuit Court of Appeals revived a lawsuit brought by a sales rep for Office Depot, who argued, in part, the company violated Illinois wage laws by paying employees three months or more after a sale was invoiced.
In that lawsuit, plaintiff Daryl Sutula-Johnson argued the compensation policy, which replaced the Office Depot's former policy following its merger with competitor OfficeMax, violated the law. Under the policy, Office Depot set quarterly sales targets and established an incentive payment of 13.5 percent or 10 percent of all quarterly sales.
Michael Furlong
| Fisher Phillips
The amount received by employees depended on whether they exceeded the goal. While the new policy allowed employees to accrue incentive payments upon invoicing, it also pointed out they would not earn the payments until Office Depot paid them. Sutula-Johnson said this payment typically came 45 days after the close of each quarter.
Office Depot argued the company's policy should be used to dictate when a commission is considered "earned" under the Illinois Wage Payment Act, which others would require such commissions to be paid within a month.
A federal judge in Chicago sided with Office Depot on the question. But Sutula-Johnson appealed, and the Seventh Circuit reversed the district judge's grant of summary judgment to Office Depot on the question of "earned" commissions."
The appellate judges determined such comissions should be considered earned on the date employees "complete (their) duties on the project that 'earns' the commission," said Michael Furlong, a labor and employment attorney with the firm of Fisher Phillips, in Chicago.
“The court decided when commissions are ‘earned’ regardless of how the term is defined in the employer’s commission policy or agreement," Furlong said. "The court also did not give deference to the Illinois Department of Labor regulations.
"…Under the definition of commissions ‘earned’ in Sutula-Johnson, employees could be entitled to full commission payments even before the sale is invoiced," he said.
Furlong said this decision may cause sales employees to believe they are owed commissions quicker than the employer is prepared to pay them. Still, there’s a chance other employers couldl challenge the appeals court’s decision under the notion it’s too unambiguous.
“Employers will argue their policy is unlike the underlying commission policy in Sutula-Johnson, and therefore the case cannot be applied universally,” said Furlong. “One argument employers may make is that the extensive length of time the employer in Sutula-Johnson waited to make commission payments (45 days after each quarter) likely influenced the court’s decision to completely disregard the underlying commission policy."