Employers (related to their commissioned employees) and Manufacturers (related to their commissioned independent sales reps) must be completely knowledgeable of the law around bad faith termination.
Understanding Bad Faith Termination in California
In California, the termination of commissioned sales employees and independent sales reps is governed by a combination of Court cases affecting contract and employment law, as well as specific statutes.
California Labor Code Section 2751 requires Employers to provide a written contract to commissioned EMPLOYEES detailing how sales commissions are calculated and paid. A nice guideline; but this statute does not have any penalty provisions for failing to do so.
California Civil Code Sections 1738.10 – 1738.17 (California’s Wholesale Sales Rep Commission Protection act), on the other hand, was legislated to protect INDEPENDENT SALES REPS, not employees. Some of the provisions in this Act provide independent sales reps with substantial leverage in sales commission disputes. For example, Section 1738.15 requires a judge to award 3 times the damages proven on a breach of contract claim to an independent sales rep who was knowingly deprived of their sales commissions. A pretty nice sledgehammer indeed!
Many other states have discretionary statutes allowing judges to award double or triple damages to independent sales reps. But California’s statute is mandatory if the conduct by the defendant was willful.
As far as the common-law (the case law developed in this area) it has been established that Bad Faith termination typically occurs when an employer terminates an employee with the intent of avoiding paying earned commissions/bonuses or to otherwise interfere with the employee’s contractual rights. Such as nixing a nearly vested pension through an orchestrated termination.
In recent years, California courts have refined the standards for these claims, emphasizing the importance of proving Employer/Principal intent to deprive employees or independent sales reps of commissions they rightfully earned prior to their termination. This can include sales commissions which are not even payable until after termination.
Other lines of cases have highlighted that even in at-will employment, or with independent sales rep contracts terminable on 30 day notice, employers must sometimes prove that they acted with valid business reasons (in good faith) for a termination, and avoid any actions that appear to undermine the employee’s ability to receive due compensation.
These cases highlighted that employers must act with clear business reasons for termination other than avoidance of paying commissions or bonuses. Other courts have held that Legal challenges may rightfully ensue when terminations occur In advance of large sales commissions becoming due.
If a decision to terminate an employee is being considered, it’s critical to consult legal counsel to ensure the action is justified and not perceived as an attempt to withhold commissions. A golden parachute upon termination is not always required, but some compensation for terminations that may otherwise be looked at as suspect is advisable. Maybe a copper parachute will suffice.
How Sanders Montalto LLP Can Help
At Sanders Montalto LLP, we specialize in advising employees and independent sales reps concerning their sales commission compensation, how to protect it in contract provisions, and how to recover proper compensation when sales commissions are wrongfully denied.
Scott M. Sanders, Senior Partner has 30 years of experience with 98% success rate in representing independent sales reps throughout the US; with Judgments and Settlements for independent and employee sales reps in California, Nevada, Oregon, Washington, Arizona, Texas, Illinois, Ohio, Minnesota, Pennsylvania, New York, New Jersey, Connecticut, Massachusetts, Maryland, North Carolina, South Carolina, Florida and Georgia. . Total judgments and settlements of approximately $30,000,000 including triple damage awards under California’s Sales Commission Protection Act. And double damage award under New York’s Sales Commission Protection Act.Click https://sandersmontalto.com/contact/ to schedule a consultation.
