Arizona law with respect to payment of bonuses and/or commissions is not always clear. There are many issues for both the employer and employee to consider. Below is a summary of some of things both parties should consider in any bonus or commission dispute.
Is There an Agreement and, if So, What Does it Say?
The starting point is always the same – is there an agreement about when and how commissions or bonuses are to be paid? If so, just what are the terms of the agreement? That agreement may be in the form of an employment contract, but it also could be found in a commission structure or other employer policy. An employment law attorney cannot give meaningful advice without a complete understanding of all of the terms of any agreement or policy.
Employees are Not Required to Be Paid Discretionary Bonuses.
Employers can choose to give (or not give) bonuses. If a specific bonus can be measured and is promised at a certain time, the employer must pay it. But if the employer has said that it may give a bonus, but it will later decide when and how much, then the bonus is discretionary.
If the bonus is discretionary, the employee has no claim to it. Under Arizona law, an employer cannot be forced to pay a discretionary bonus.
For example, many employers give bonuses at the end of the year. The amount of any such bonus may be determined based on a combination of objective and subjective measures. If the employer has not promised a specific or measurable amount, an Arizona employee has no right to be paid this kind of discretionary bonus. Paying a discretionary bonus year after year does not change that.
Conversely, if the agreement states that the employee will be paid a fixed percentage of all collections, the employee has a right to be paid that percentage once the money is collected, assuming there are no other terms or conditions in the agreement.
“A Deal is a Deal,” Probably.
If an employer promised to pay a bonus or commission, and the amount can be ascertained, the employer almost certainly owes it. But there may be other terms and conditions that may also need to be satisfied before the employee has “earned” the bonus or commission. For example, the agreement may state that the employee must be employed when the bonus or commission is normally paid. Some agreements state that the amount is only paid upon collection or that set offs or listed credits can be taken from the amount earned. As long as the agreement is clear, and was implemented before the services were provided, such terms or conditions will likely be enforceable. In other words, “a deal is a deal,” probably.
In some cases, a non-discretionary bonus for one year may not be paid until March or some other time in the next year. Any such terms and conditions are probably enforceable. Such terms, however, need to be clearly communicated to the employee, generally in writing, and this must occur before the services that result in a bonus or commission have started. Again, any clearly set out deal is likely to be enforced.
Ambiguity Generally Favors the Employee.
A common problem involves commissions that may otherwise be due, but the employee has left the employment. If that circumstance is not dealt with in the agreement or commission structure, then an employee likely has a valid claim. When an agreement is missing an important provision, some of the factors a court may consider include:
What did the employer and employee expect would happen?
What was each’s “reasonable expectation,” and was there any discussion about it?
How has the employer dealt with the situation in the past (any precedent?)
What is the custom in the industry?
Any ambiguity in the agreement is generally construed in favor of the employee. Thus, it is best if both employer and employee agree, in advance, to the expected structure of any commission or bonus. It is especially important to consider – and set out – what would happen if the employee departed.
Bad Faith
Arizona law requires an employer pay a discharged employee within seven days of discharge. If the employee quits, the employer has until the next payroll period to pay any earned wages. Wages mean any sums which the employee has already earned. In legal terms, wages “means nondiscretionary compensation due an employee in return for labor or services rendered by an employee for whom the employee has a reasonable expectation to be paid...” A.R.S. §23-350(7). Thus, wages should mean any commission or bonus already earned.
If an employee can show the employer acted in bad faith by not paying a bonus or commission when earned and due, he or she could potentially recover three times the amount of whatever is owed. An employee may also be entitled to an award of attorney's fees.
Conclusion
Employers need to have a clear, written policy or employment agreement outlining all of the terms and conditions that must be satisfied before any bonus or commission payment is to be made. Arizona employees and employers should consult with an experienced employment attorney to help resolve any dispute as to bonuses or commissions because there is a lot to know and consider.