When a commission is earned v. when it’s due

By Adam Glazer, Esq., SFBBG

Consider this brief hypothetical – devised not by your author, but by the Honorable Albert Berry III of the Chicago federal court: A home builder signs reps to contracts calling for them to solicit sales, while stating their “commissions become due 10 days after closing, but they do not earn commission until they complete a list of tasks that includes presenting the keys to a new homebuyer at closing.” Once such a contract is signed, the home builder seeking to avoid any payment obligation could terminate the rep “a week before the closing was scheduled to occur and successfully argue that the commission never became due.”

This hypothetical principal extracting everything possible from its sales rep, and then construing their contract to deny fair compensation, may sound familiar to many readers. Fortunately, the law does not support such an unreasonable construction. Here’s how Judge Berry came to offer his hypothetical:

The background

Audra Fox and Jean Green both solicited home sales for Phillipe Builders, Inc., a custom home builder in the Chicago area pursuant to a written contract. Phillipe expected them to show prospective buyers around its model homes and discuss the available floor plans and other home options. Once a floor plan and other fixtures and modifications were selected, Fox and Green would solicit the sale of the home by getting the prospective buyer to sign a contract.

Buyers had a 5-day revocation period to change their minds, and were then locked in and became Phillippe customers. Owner Robert Phillippe claimed that Fox and Green were expected to assist buyers during the building process with any structural or material changes they desired, and then ensure those price differences were included in the final tally at closing. His view was “the work begins” once a contract is signed because he must make whatever changes the buyer wants.

These two reps were to be paid under a sliding scale commission structure between 1.75 and 2.5 percent under the contract. Yet, Fox solicited sales for Phillippe for nearly 10 months, and was only paid between 0.5 and 0.87 percent on certain sales. Green endured for 14 months, but did not get commissioned at all on several properties where she had solicited the sales prior to leaving Phillippe.

Robert Phillippe admitted that Phillippe did not commission them when a sales contract was signed, stating it was because they had not “done all the work to get to the closing.” He further admitted that if sales reps resigned or were terminated before closing, it was not his practice to pay commissions, even on sales they had successfully solicited.

The lawsuit

When Phillippe failed to pay commissions under the contractual pay scale, Fox and Green were forced to litigate. Their complaint alleged Phillippe violated the Illinois Sales Representative Act (ISRA), a statute requiring principals to pay “all commissions due at the time of termination of a contract” within 13 days of termination, and “all commissions that become due after termination within 13 days of the date on which such commissions become due.”

Their case proceeded to trial before Judge Berry, who recognized that “the nature of sales work often leads to a gap between when an agreement for a sale is made between a sales representative and a customer and when the payment is received by the principal.” This can produce situations where the rep gets terminated “between when the order is solicited and when payment is received, and commissions may become due” after termination.

When is the commission earned?

A “problem” he identified with the language in the ISRA “is that it considers when commission shall be paid to the sales representative (i.e., when it “becomes due” or owed), but not when it is earned in the first place.” In order for the statute to “work properly,” these two concepts must be distinct. Were a commission not earned until after the order is solicited, “it leaves an enormous amount of space for an unscrupulous principal to exploit a sales representative.”

As the judge demonstrated in his hypothetical, such a result “would be antithetical to the ISRA, which is designed to protect sales representatives like Fox and Green.” Accordingly, “the more logical reading of the ISRA demands that sales representatives earn a commission upon soliciting orders. At that point, the principal owes the sales representative some future amount to be determined by percentage of the final sale price.”

Orders solicited by Fox and Green became locked in after the 5-day revocation period expired, and the evidence at trial showed “it was exceedingly rare for a sale to fall through.” Once the five days were up, “it was a virtual certainty that Defendant would receive hundreds of thousands of dollars in revenue from the home sale solicited by Plaintiffs.”

This finding led the Court to conclude that after the five days, “Plaintiffs had successfully solicited orders for custom homes built by Defendant and had earned a commission on the sale.” Phillippe’s argument that commissions weren’t earned until Fox and Green completed certain post-contract duties with the buyer was firmly rejected.

When is the commission due?

That left the question of when the earned commissions became due. Phillippe argued that no commissions were due until all of the work between execution of the sales contract and closing was completed, such as “maintaining positive client contacts, assisting buyers through the selection process for structural and design elements, etc.”

Judge Berry quickly deemed this position “untenable” due to the host of questions it raised. For example, which job duties need to be completed for a commission to be earned and who gets to decide if they were done satisfactorily, and what if Phillippe felt Fox and Green did not properly complete the work but the sale closed anyhow. Phillippe could choose to terminate their contracts, but not withhold commissions on sales already solicited and closed.

“Allowing the principal to determine which commissions are earned based on nebulous post-solicitation tasks leaves open the potential for abuse, or at the very least, creates significant uncertainty for sales representatives. The Court does not believe the ISRA supports such a reading.”

The Court recognized that under the ISRA, sales reps “are not contracted to close transactions or collect funds; they are not contracted to maintain positive client experiences or assist with selections of finishes,” as Phillippe contended. “Under the plain language of the ISRA, they are contracted to solicit orders.”

Further, the Court recognized that by calling for commissions that become due after termination to be paid within 13 days of the due date, the ISRA contemplates how sales reps can “earn commissions by soliciting sales, but for those commissions not to become due until after termination.”

Because the contracts did not specify when commissions became due, Judge Berry turned to the ISRA’s common sense provision stating: “if the terms of the contract do not provide when the commission becomes due, or the terms are ambiguous or unclear, the past practice used by the parties shall control.”

The trial evidence showed that, when paid, neither Fox nor Green ever waited more than 22 days after closing to receive a commission check. Accordingly, this past practice of the parties, taken together with the statutory language requiring commissions to get paid 13 days after they become due, meant they “should have been paid within 35 days after the relevant closing date.”

The ruling

The Court found Phillippe was in violation of the ISRA, and awarded Fox and Green their full commissions, plus attorneys’ fees and costs. The exceptionally astute reasoning in this decision should prove beneficial to many reps caught in similarly unfair, and non-hypothetical, situations.