An often uncomfortable and confrontational issue that can arise in any size agency
In 2011, Agency Checklists wrote a cautionary article about the potential risk to insurance agencies arising out of commission disputes between agencies and commissioned producers. On April 10, 2013, the Massachusetts Appeals Court issued a decision clearly finding that commissions are wages subject to a state statute that all agent-owners should know about. Specifically, that state statute mandates that any unpaid commission resulting in a court judgment must be trebled and that in addition to paying its own attorneys fees, the losing defendants who did not pay the commissions must also pay the attorney’s fees for the unpaid employee in bringing the action.
A $12,000 thousand dollar commission dispute results in a final judgment jointly against the corporation and its president resulting in almost $70,000 exclusive of their own legal costs.
The Appeals Court case, Weber v. Coast to Coast Medical, Inc. et al., did not involve an insurance agency but the legal principles the court applied in this commission dispute will still apply to them. The reason why is that the decision invokes a statute which applies to all Massachusetts businesses including insurance agencies with commissioned producers.
The legal case arose out of a lawsuit against a Fall River company, Coast to Coast Medical, Inc. that sells used and refurbished medical equipment. The plaintiff, Mr. Weber, was a sales person who had a base salary of $40,000 per year plus commissions. Medical always paid the base salary but it only once paid Mr. Weber any commission before it laid him off in November 2008. When he was laid off, Mr. Weber demanded his unpaid commissions. Medical refused to pay him the claimed commissions and Mr. Weber sued.
After the filing of the suit, a jury eventually decided Coast to Coast owed a little over $11,900 in back commissions to Mr. Weber. The presiding judge, however, then applied the Massachusetts unpaid wage statute and trebled the commissions due and also awarded the plaintiff an additional $25,000 for his attorneys fees. As a result, the net commission dispute for the $11,900 resulted in a verdict that exceeded $60,000. When pre-judgment and post-judgment interest also are added that number will likely exceed $70,000. Note, that this amount does not include Coast to Coast’s own legal bills which it will of course have to pay for the jury trial and appeal.
Commissions are wages under statute that makes corporate officers personally liable for payment and that requires trebling of award and payment of plaintiff’s attorney fees.
In its appeal, Coast to Coast argued that the term in the wage statute provided for the recovery of “lost wages and other benefits”. As such, it argued that it could not reasonably be read to encompass “commissions”. The appeals court, however, disagreed with Coast to Coast’s argument and stated that commissions would be considered wages. Thus, the only requirement before the wage statute could apply would be to determine that the commissions were “definitely determined” and “due and payable”.
Once those conditions are met, the wage statute makes any jury award in favor of the commissioned employee subject to a mandatory trebling and a mandatory award of the plaintiff’s reasonable attorney fees.
In addition, under the statutes involved, company officers may also be held responsible for the company not paying the commissions due and payable to a commissioned producer. As a result, these company officers can be sued and can be held personally liable if the company does not or cannot pay the award. For example, in the Coast to Coast case, the president of the company was sued with Coast to Coast and the ultimate judgment was entered both against him and the company jointly.
Agencies that pay producer commissions should carefully document the relationship and how commissions are “definitely determined” and when commissions are “due and payable.
The Coast to Coast case highlights the potential liability that insurance agencies can face from this type of suit. As detailed in Agency Checklists’ first article on this issue, there are a number of issues that agencies should document with regard to commissions payable to producers. Simply calling them “independent contractors” in and of itself may not solve the issue and may not pass the Massachusetts independent contractor statute’s tests, if applied. Also, agencies should be especially careful of entering into any type of oral or undocumented commissions agreements with its employees. Ordinarily, the Massachusetts statute of frauds applies to employment contracts that extend beyond a year (must in writing and signed by agency) but, this rule of law has many exceptions that will often make a signed contract legally unnecessary.