The Continued Importance of Reviewing Post-Termination Commission Payments, as appeared in New York Employment Law Letter

As appeared in New York Employment Law Letter, June 2010.

A recent decision by the New York Appellate Division, First Judicial Department, serves as a valuable lesson to employers with commissioned employees. When drafting written commission agreements, as required by N.Y. Labor Law § 191(c), you must ensure that you clearly define when a commission is considered "earned."

In the case, the Appellate Division reinforced the long-standing policy that once a commission is earned, it can't be forfeited, even if the employee who earned it is no longer employed when it is payable and the commission agreement provides that commissions are paid only if the employee is still employed when they become due.

The Case

The employee in this case was an executive search consultant for Kennedy Executive Search, Inc. (KES). His commission agreement provided that he was eligible "to earn commission compensation in respect of placements arranged by Employee on behalf of KES." According to the wording of the agreement, the commission was earned at the time placements were arranged. Payment of the commissions was to be made in the calendar month following the month in which KES received payment from the client, provided it recovered certain costs. The commission agreement also provided that "no commission shall be due" in the event the individual "is not in the employ of KES at the date the commission payment would otherwise be made."

KES received payment from a client in March for a placement the employee had arranged; however, under the commission agreement, the commission would have been payable in April, after the employee's termination date in March. Since he was no longer employed by KES when the commission was due, the company attempted to avoid a dispute with him by paying him a portion of the commission, but it didn't pay him the entire amount due. The court noted that after the employee's termination, KES also received fees from other placements he had arranged; however, it didn't pay him any further commissions.

Court's Decision

Although the lower court dismissed the employee's complaint for unpaid commissions, noting that "the employment agreement expressly deprives [him] of post-termination commissions" and there was "no allegation that [KES] failed to pay [him] commissions for placements he finalized and for which fees were received prior to his termination," the Appellate Division reversed the decision and found that the employee "has sufficiently stated a breach of contract claim for unpaid earned commissions that he 'arranged' prior to his termination." Arbeeny v. Kennedy Executive Search, Inc., ___ N.Y.S.2d ___, 2010 WL 114948 (1st Dept., Jan. 14, 2010).

Bottom Line

While this case doesn't prohibit you from foreclosing the possibility of an employee earning a post-termination commission, to do so, it's imperative that you explicitly state that commissions are earned only if the entire transaction is completed during the employment and the employee is still employed by the company on the date the commissions are due to be paid. To ensure that your commission agreements are enforceable, we recommend that you immediately consult with your employment law attorneys.

Copyright 2010 M. Lee Smith Publishers LLC