New York’s Labor Law Now Requires That Commission Sales Agreements Be In Writing

October 2007Alerts Labor & Employment Practice Area Alert

In July 2007, New York Labor Law was amended with regard to compensation paid to commissioned sales staff. N.Y. Labor Law § 191(c). Prior to the July 2007 amendment, the law provided that commissioned salespersons (see note 1) be compensated in accordance with the agreed upon terms of the employment, but did not explicitly require that the agreement be in writing. The new law, which took effect on October 16, 2007, requires that such agreements be in writing and signed by the employer and the employee.

Frustrated by difficulties in investigating wage complaints by commissioned salespeople because there was no written agreement and plagued by investigations that are often bogged down over “he-said-she-said” disagreements between employer and employee about the terms of commission agreements, the New York Department of Labor (the Department) asked the Legislature to enact a law that required employers to prepare and execute written commission agreements with commissioned sales staff. In addition to requiring that the commission agreement be in writing, the law warns employers that adverse consequences may result should a compensation dispute arise without an agreement in place. The law’s drafters included a presumption in favor of employees that, in the absence of a written agreement, the Department will take the position that the agreed upon terms are the terms presented by the employee, not the employer. Simply put, absent a written agreement, this provision resolves any issues concerning what was agreed upon in favor of the employee.

However, the new law requires more than just a written agreement; the writing must include certain terms. First, the new law requires that the agreement contain a detailed description of how wages, salary, drawing account, commissions, and other earned and payable money is calculated. Second, if commissioned salespeople are entitled by the agreement to a recoverable draw (an advance on future commissions), the writing also must include the frequency with respect to which the draw is reconciled. This provision was added so that any discrepancies between the employer and the employee can be identified and resolved sooner rather than later. Furthermore, the agreement must detail how wages and other forms of compensation are to be calculated if the employment relationship is terminated. Based on the presumption, it can be anticipated that where the terms are absent or uncertain, the Department will resolve any disputes as to the meaning and import of the terms in favor of the employee.

Finally, the new law requires that employers maintain the agreements for three years. As a practical business matter, employers may want to maintain the written agreements for up to three years after the employment relationship is terminated.

Implications for Employers

The failure to reduce the commissioned sales agreement to writing has serious consequences for employers. New York employers should memorialize all commission sales agreements with their salespeople, and, at a minimum, include in each agreement the terms specified under the new law. Even employers that currently use commission sales agreements should review each agreement to ensure that it contains the terms specified under the new law, and that it is signed by the employee and a company signatory with the authority to bind the company.

Such an agreement affords employers several protections. First, having an agreement that comports with the new law will reduce the risk of mistakenly false or intentionally fraudulent compensation claims by disgruntled current or former employees. Second, the agreement allows employers the opportunity to establish internal procedures for commissioned salespeople to follow in the event of a dispute, which potentially could resolve the matter well before it gets to the Department stage. Finally, the agreement allows for regular earnings statements and, in the case of recoverable draws, a regular accounting of how much is owed to the employer (i.e., where the draw exceeded the commissions earned) or the employee (i.e., where the commissions earned exceeded the draw).

To further protect themselves, New York employers may want to include language that underscores that the agreement: is not an employment agreement, is limited to compensation, and does not promise continued employment with the company. Employers also may want to specify in the agreement that the employment remains at-will and that the employment relationship may be terminated by either party for any reason, with or without cause or notice. Where possible, employers should avoid including in the agreement any reference to the duration of the agreement. The absence of language reflecting that the agreement is for a specific length of time will make it more difficult for a commissioned salesperson to argue that the agreement was an employment contract.

With respect to the specific needs of your company, you should consult legal counsel about developing and implementing a review process that takes a close look at your relationships with commissioned salespeople, a process that should involve human resources staff. If appropriate, legal counsel may need to draft a commissioned sales agreement that meets the requirements of the new law.

For more information regarding this Alert, contact Darryll A. Buford at 212.878.7950 or [email protected] , or another member of the Labor & Employment Practice.

1) Under the New York Labor Law, a commissioned salesperson is “any employee whose principal activity is the selling of any goods, wares, merchandise, services, real estate, securities, insurance or any article or thing and whose earnings are based on whole or in part on commissions.”