Case Law Review: Commission Based Compensation could land you in trouble.

In this case law review article, we review disputes between employers and employees that have emanated from commission-based compensation for sales persons in the employment contract.

We explore gaps that led to the claimants (employees) being awarded in favor of their demands for commissions not paid or where there was unfair deduction to the employees for sales not paid for by an employer.

Highlights of the Cases

In case A, an employee resigned from the services of the employer and served two months’ notice as was required of her contractual agreement. During her discharge upon serving her notice, her pay was deducted KES 232,000/= from her final dues.

In their defense, the employer claimed that the money was being recovered for pre-paid commission through post dated cheques. The employer also presented their credit policy that had been communicated to the sales and marketing executives.

In case B, an employee employed as a salesman and was unfairly terminated during his sick leave and was claiming unpaid commissions during his tenure totaling to KES 3,851, 140.38. In their response, the employer claimed that the employee had collected sales revenue from customers but had not remitted the same to the company.

Issues

In case A, the claimant wanted the judge to determine whether they were entitled to recovery of deductions made by the employer in the sum of 232,000/-. It was the employer’s response that the employee had failed to collect the outstanding amount from the customer.

In Case B, the claimant wanted the judge to determine whether he was entitled to various terminal benefits including unpaid commissions. The employer filed a counterclaim that the employee had misused company assets (company car), had collected unremitted sales revenue and was therefore not entitled to the commissions.

Judgement Highlights

In case A,the judge ruled in favor of the claimant as the credit clearance had five levels of check stretching within the sales department, credit control department and senior management. How then did the burden to recover the sale only fall on the employee?

Moreover, the job that was meant to be paid for was not done (the advertisement did not run) and hence why the client did not honor the payment. How then was this the employee’s burden to bear?

In case B, the judge ruled in favor of the claimant on account of providing proof on a balance of probabilities that commissions earned were not paid. It was also the claim for the unpaid commissions by the employee that led to victimization by the employer and ultimately their termination.

Lessons Learnt

From these two cases, we can learn that employment contracts whose compensation is not only a salary but also based on commission need to be managed to ensure commissions due to employees are paid.

Some 5 tips to guide the management of these type of contracts.

1.Give addendums to contracts.

The contractual agreement issued during employment relating to the compensation clause may change from time to time. This particularly pertaining to commission structure, frequency of payment of the commissions and their itemization in relation to the sale they are being paid for. An addendum to contract ought to resolve this, provide clarity to the employee and also be a point of reference where a dispute emerges.

2. Qualify a sale.

It is important to qualify what a sale is in your organization’s context depending on your nature of business. Is a sale based on the number of goods sold or a revenue target? Is it a sale if the revenue from the sale has not been received? This clarity can equally be brought out in the addendum to the contract.

3. Credit Policy

What is your credit policy and how does it affect what is qualified as a sale? Is the commission due on delivery of goods or in the customer honoring their credit period? Who bears the responsibility of this credit policy if the debt remains unpaid by the customer?

4. Justice and Fairness

It is only fair that commissions earned are paid when they are due. It is good practice to honor the commission commitment and not deny the employee what is due to them. Business ethics call for giving the customer what they pay for. It is also only ethical to honor that which you have committed to your employee as they contribute to your business’s success.

5. Itemized pay statement

It is required by law as per Employment Act Section 20 (c) to itemize pay earned by an employee and this also includes commissions. The payroll for sales and marketing executives can not be generalized as that of non-sales staff.

Disclaimer: These case studies are for informational purposes only from case laws or information in the public domain. Opinions expressed here are solely of the author.

They are therefore not meant to infringe, interfere or damage the reputation of the mentioned institutions or parties. It is also in no way meant to influence any ongoing judicial process related to the cases mentioned.

Source credit:

Case A : http://kenyalaw.org/caselaw/cases/view/240574/ – Vera Nkirote Vs Radio Africa Group Ltd

Case B: http://kenyalaw.org/caselaw/cases/view/158098/   – Hudson Kidaha Vs Ramageco kenya Ltd

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