For many workers, commissions form a significant part of their
compensation. Commission agreements can
be complex, and employers often draft them to include offsets for certain
expenses in the calculation of the final commission due. Can they do this? The answer is not entirely clear, but a
recent Massachusetts Superior Court decision suggests that employers should use
caution, and employees paid on a commission basis should be watchful and review their commission plans carefully to be sure that there are no inappropriate deductions.The Massachusetts Wage Act requires timely payment of wages and commissions, and has been interpreted to prohibit deductions from the wages of hourly or salaried employees unless they are a valid set-off under Massachusetts law. This means if you are an hourly or salaried employee, your employer may deduct things like medical and dental insurance premiums, taxes, and court approved garnishments, but cannot deduct expenses associated with your work.
It has been less clear how the prohibition against deductions applies to deductions from commissions. It is not an uncommon practice for employers to include certain costs in the calculation of commissions, many of which are really a means of transferring the employer’s overhead expenses. For example, a commission formula for a salesperson may include deductions for expenses associated with the sale.
The Massachusetts Wage Act explicitly includes commissions within its scope, and states that it is applicable: “…when the amount of such commissions, less allowable or authorized deductions, has been definitely determined and has become due…” M.G.L. ch. 149, § 148. Until recently, there has been no guidance in the Massachusetts case law about the meaning of “allowable or authorized deductions."
Smith Lee Nebenzahl represents a hair stylist whose compensation was based on a percentage of the revenue from the clients she serviced. The salon applied a “product deduction” of $2.00 for each client serviced, purportedly to cover the cost of the shampoo, conditioner, or other product used, which was deducted after the calculation of the commission. The crux of our argument was that an employer should not be able to do to a commissioned employee what it cannot do to an hourly or salaried employee- namely, to transfer a portion of the employer’s overhead expense to the employee.
The salon moved for summary judgment, arguing that the deduction was an integral part of the commission calculation, and that it was therefore an “allowable or authorized deduction.” In an opinion dated July 7, 2014, the Massachusetts Superior Court denied the salon’s motion. The court noted a prior decision of the Massachusetts Supreme Judicial Court, which “emphasized that deductions which further an employer’s interests, including the transfer of overhead costs to employees, are impermissible, as running strongly against the legislative policy which underlies the Massachusetts Wage Act."
If followed by other courts in Massachusetts, the implications of this decision could be significant, and affect the rights not only of hair stylists whose pay is affected by “product deductions,” but also other employees paid pursuant to complex commissions formulas that may similarly involve an impermissible transfer of the employer’s costs. If a deduction is not permitted, the deduction is likely a violation of the Wage Act, which requires that the employee be awarded three times the amount of the wages withheld, along with reimbursement for reasonable attorneys' fees incurred in enforcing the Wage Act.
