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The science of the sale: Pinpointing motivated customers through lead generation technology

National Mortgage Professional
Aug 15, 2008

New rules on payment of commissions to salespeople in New YorkRichard H. Lovell Esq.Truth-in-Lending Act, Real Estate Settlement Procedures Act, Article 12-D of the New York State Banking Law, Internal Revenue Code, wages Disclaimer: Nothing contained herein is deemed to provide legal advice. You are strongly advised to retain the services of an attorney before acting or relying upon any of the information contained herein. As Mortgage Brokers are well aware, mortgage entities have to comply with a myriad of specific federal, state and local laws and regulations that govern their everyday existence: Truth-in-Lending Act, Real Estate Settlement Procedures Act and Article 12-D of the New York State Banking Law, to name just a few. Then, of course, Mortgage Brokers have to comply with even more laws, regulations and court opinions that all businesses must adhere to as wellequal employment opportunity laws, the Internal Revenue Code, federal and state labor laws, and so on. Mortgage entities, which need no more rules and regulations, have more in store for them. How employers compensate their employees has, for some time, been a highly regulated area. Issues that need to be considered include: Is the employee an inside worker who should be issued a paycheck, less appropriate withholding taxes, with a W2 form issued to him every January? Is the person truly an independent contractor who is eligible to be paid, in full and without deductions, and who is to be issued a 1099? Are minimum wage and hour regulations, including overtime rules, being complied with? Misclassification in any of these areas can be incredibly costly. Well, thanks to the New York State Legislature, along with a recent decision by the United States Court of Appeals for the Second Circuit, those that pay sales commissions now have even more thoughts to ponder. All commission sales agreements are to be in writing It is now the law in New York that all commission sales agreements between an employer and the salesperson must be in writing. Failure to have such a written sales agreement can have a disastrous effect for the employer, should the salesperson make a claim for a commission payment that is at odds with what the employer believes is owed. The law provides that there is a presumption that the salesperson's claim is correct, unless the employer can prove otherwise by producing a written agreement between the parties. There is also a presumption that if there is an ambiguity as to what is meant by a term contained in the agreement, the presumption will go against the employer. Stop and think about this for a minute! Say a salesperson states that you promised her a $10,000 bonus if she closed a certain dollar amount of mortgage loans, and she has reached that threshold. Absent a written agreement, there will be a presumption that the salesperson's claim to that bonus is valid. It should be noted that it will be extremely difficult, and costly, to overturn this presumption that the salesperson's claim is valid. Are you ready to take out your checkbook? Not when you can easily avoid this type of dispute by having a well-drafted agreement between you and your salesperson. This agreement should contain: •How the salesperson's commission is to be computed; •All of the terms of the employment agreed upon by the parties; •How a draw can be recovered by the employer; and •How the salesperson will be paid upon leaving the employer. This written agreement is to be retained by the employer for at least three years. How a commissioned salesperson is to be paid after he leaves his position is usually the item that is most in dispute. Employers usually want to limit this payment and, naturally, the employee will claim that he is entitled to every penny, as if he were still employed. Again, absent a written agreement, the employee will undoubtedly prevail. Deductions from commissions When is a commission earned and irrevocable? There have been disagreements between commissioned salespeople and their employers for about as long as there have been commissioned salespeople. Disputes often arise in the business world, and the best defense against a dispute arising is, of course, a written agreementhurray for the lawyers. Section 193 of the New York State Labor Law limits the deductions that an employer can make from "earned" commission checks and when that commission is earned. Now, based upon a decision of the United States Court of Appeals for the Second Circuit, Elaine Pachter v. Bernard Hodes Group, it is now clear that employers in New York who pay commissions to their salespeople have even more constraints on their practices. Absent any written language to the contrary, an employee's commission is earned when that salesperson does the minimum to get the job completed. In the case of a retail salesperson, for example, a commission might possibly be considered to be earned by the simple act of the customer walking into the store and being greeted by the salesperson. Without a written agreement between the parties, the same analogy could be used for a mortgage loan originator. It could be argued that the commission is earned when the salesperson develops the lead, and not necessarily when the mortgage loan closes and the employer receives its fees. As the above illustrates, it is extremely important to define, in writing, what a salesperson needs to accomplish in order for a commission to be earned and final. Once a commission is deemed earned, it is final and it cannot be taken away. No deductions can later be made for anything, including potential refunds and/or buybacks. Of course, provisions can be made for certain deductions, such as refunds, within the agreement and, if reasonable, will most likely be upheld. Many employers seem to believe that if an employee's relationship with the employer is terminated, then the employer no longer has to pay the salesperson a full, or perhaps even a partial, commission. This is incorrect! Once that commission is earned, as defined by the written agreement, it is irrevocable and no deductions can be made by reason of the termination. Another misconception that some employers have is that if the employer makes a personal loan to the salesperson, which is not that uncommon, the employer may make loan payment deductions from any commissions earned by him. Again, this is an incorrect assumption. The only deductions that can be made are deductions for the benefit of the employee, not those made for the benefit of the employer. You might be asking: What happens if a loan closes, the appropriate fees are received by the employer, the employee is paid his commission and then a problem arises? Perhaps 90 days after settlement, the investor demands that the loan be repurchased or that certain fees must be paid back to the consumer. Can the employer make a deduction against a future commission payment for the amount of the commission paid to the salesperson? Absolutely not, unless such a deduction is provided for in the written agreement, and also, that it is reasonable and "not against public policy." A provision in the agreement that states that the commission is not earned for, say, 90 days after settlement to protect against buybacks, refunds, etc. might be enforceable. One that states that the commission is not fully earned, even if already paid, in perpetuity will likely be void as against public policy. Finally, even if a current agreement does not properly handle the matters indicated above, all hope is not lost. If the parties agree, a new writing can provide clarification of a prior agreement. This clarification can indicate how the parties intended for the terms of the current agreement to be interpreted. As long as the salesperson was not coerced into signing this new document, and as long as it is fair and reasonable, this new document may be able to resolve disputes related to prior commissions already earned under the terms of the original contract. Richard H. Lovell Esq. was a member of the Board of Directors of the New York Association of Mortgage Brokers for more than 14 years. He may be reached at (718) 835-9300 or e-mail [email protected]
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