New guidance on bonuses and commissions may cause headaches for employers

In order to receive a commission or bonus, organizations commonly require employees to be employed on the date a commission or bonus is paid. The Colorado Department of Labor and Employment (CDLE), which interprets and administers Colorado’s Wage Act, recently indicated that practice isn’t permissible, which means employers will need to revisit their bonus agreements and commission plans sooner rather than later. The failure to heed the CDLE’s guidance may result in costly wage claims.

Overview

The Colorado Wage Act requires employers to pay employees the wages and other compensation they earn. Nondiscretionary bonuses and commissions are considered wages. Under the Colorado Wage Act, an employee isn’t entitled to wages or compensation unless such amounts are “earned, vested, and determinable.” The question, of course, is: When are bonuses or commissions earned, vested, and determinable?

Typically, a written agreement, policy, or plan will spell out exactly what criteria must be met for a bonus or commission to be earned and vested, and the bonus or commission is “determinable” once the parties are able to identify the amount of the bonus or commission at issue.

Employers generally have the ability to establish the criteria that must be met for an employee to “earn” a bonus or commission. For example, a bonus might be based in part on company productivity and in part on the employee’s sales. Similarly, a commission is often calculated as a percentage of a sale, conditioned on the customer’s payment and expiration of any cancellation period.