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].
