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May the Sales Force Be with You: Statutory, Common Law and Contractual Issues Relating to Minnesota Sales Employees and Independent Contractors

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Jeffrey B. Oberman

Oberman Thompson & Segal, LLC

One Financial Plaza

120 South Sixth Street, Suite 850

Minneapolis, MN  55402

Telephone: 612-217-6441

joberman@obermanthompson.com

 

 

EMPLOYMENT LAW INSTITUTE

Minnesota State Bar AssociationContinuing Legal Education

 

May 24-25, 2010

These materials are provided for educational and informational purposes only.  They are not intended to constitute legal advice in any particular situation.

TABLE OF CONTENTS

Page

I.          Introduction …………………………………………………………………………………………… 1

II.        Impact of Status as Employee or Independent Contractor on Benefits………… 1

A.        Taxes……………………………………………………………………………………………… 1

B…….. Benefit Plans…………………………………………………………………………………… 1

C…….. Workers’ Compensation…………………………………………………………………… 1

D…….. Unemployment Benefits…………………………………………………………………… 2

E……… FLSA Overtime Wages……………………………………………………………………. 3

III.       Impact of Status as Employee or Independent Contractor on Liabilities……… 3

A.        Liability………………………………………………………………………………………….. 3

B.        Indemnification………………………………………………………………………………. 4

IV.       The High Risks of Being Wrong………………………………………………………………… 4

A.        Labels May Not Count…………………………………………………………………….. 4

B.        Penalties…………………………………………………………………………………………. 4

V.        Factors to Determine Employee v. Independent Contractor……………………….. 6

A.        IRS………………………………………………………………………………………………… 6

B.        Minnesota………………………………………………………………………………………. 6

VI.       Termination of a Sales Person…………………………………………………………………… 7

A.        At-Will Sales People………………………………………………………………………… 7

B.        Sales People with Contracts……………………………………………………………… 7

C.        The Minnesota Sales Representative Act……………………………………………. 7

VII.     Commission Disputes………………………………………………………………………………. 10

A.        Typical Commission Contract Disputes…………………………………………….. 10

B.        Minnesota Post-Termination Commission Statutes…………………………….. 10

C.        Minn. Stat. §181.13: Employees Terminated by Employer………………….. 10

D.        Minn. Stat. §181.14: Employees Who Resign……………………………………. 12

E.         Minn. Stat. §181.145: Independent Contractor Salespersons………………. 13

VIII.    Non-Compete and Confidentiality Issues…………………………………………………. 16

A.        Potential Claims…………………………………………………………………………….. 16

B.        Potential Defenses…………………………………………………………………………. 17

IX.       Conclusion……………………………………………………………………………………………… 18


  1. I. Introduction[1]

 

This article provides an overview of employment-related statutory, common law and contractual issues relating to the Minnesota sales force.[2] If they are employees, general federal, state and local employment laws and regulations relate to them.  In addition, they often face contract and statutory issues that are unique to them, such as sales commission agreements and disputes, and are more likely than other employees to be required to sign non-compete and related agreements.

 

When evaluating a particular issue relating to a sales person, it is critical to know what contracts and what statutes apply.  It is also critical to know if the sales person is an employee or an independent contractor, and whether the person is covered by the Minnesota Sales Representative Act.  These distinctions dramatically affect the legal obligations and rights flowing between the sales person and the hiring/retaining party – ranging from compensation and benefits to liabilities and post-termination disputes.

 

  1. II. IMPACT OF STATUS AS Employee OR  Independent Contractor ON BENEFITS

 

In the modern workplace, the use of independent contractor relationships with sales people, like others, has flourished.  If they retain independent contractors, rather than hire employees, employers can often avoid social security and unemployment insurance taxes, payroll tax withholding obligations, insurance and retirement benefits, workers’ compensation obligations, overtime pay and other legal obligations to the person – as well as the obligation to defend and indemnify the person for actions done within the course and scope of the job.

 

  1. A. Taxes. Independent contractors are responsible for payment of their own taxes.  Employers are relieved of the obligation to pay social security and unemployment insurance taxes, and need not withhold payroll taxes from payments made to an independent contractor.  See, e.g. I.R.C. §3509.

 

  1. B. Benefit Plans. Generally, independent contractors are not eligible for an employer’s employee benefit plan.  Employee benefits typically cost employers between fifteen to thirty percent of the base pay to that person.
  2. C. Workers’ Compensation. Under the Minnesota Workers’ Compensation Act, only employees are eligible to collect compensation for work-related injuries.  Minn. Stat. §176.021.  Employee is defined as “any person who performs services for another for hire.”  Minn. Stat. §176.011, subd. 9.  Minn. Stat. §176.041 lists numerous exceptions to the definition of “employee,” including an independent contractor.

 

  1. D. Unemployment Benefits. Minnesota’s unemployment insurance program is only applicable to individuals who meet the common law definition of the employer-employee relationship.  Minn. Stat. §268.035.
    1. No Unemployment Benefits for Independent Contractors.  Employment includes service performed by “an individual who is considered an employee under the common law of employer-employee and not considered an independent contractor.” Minn. Stat. §268.035, subd. 15 (1).
    2. Regardless of Classification, No Unemployment Benefits for Commissioned Real Estate Sales Persons. Employment does not include employment “as a real estate salesperson, by other than a corporate officer, if all the wages from the employment is solely by way of commission.”  Minn. Stat. §268.035, subd. 20 (29). 
    3. Regardless of Classification, Only Certain Types of Traveling Salespersons Qualify for Unemployment Benefits.  To qualify for unemployment benefits, a traveling salesperson must meet the following definition of employment: “traveling or city salesperson, other than as an agent-driver or commission-driver, engaged full-time in the solicitation on behalf of the person, of orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments for merchandise for resale or supplies for use in their business operations.  This clause applies only if the contract of service provides that substantially all of the services are to be performed personally by the individual, and the services are part of a continuing relationship with the person for whom the services are performed, and the individual does not have a substantial investment in facilities used in connection with the performance of the services, other than facilities for transportation.”  Minn. Stat. §268.035 subd. 15 (5) (ii).
    4. Regardless of Classification, No Unemployment Benefits for Direct Sellers.  Direct sellers are not eligible to receive unemployment benefits.  Minn. Stat. §268.035, subd. 20 (30) refers to the federal unemployment statute for the definition of a direct seller.[3] For example, an employee who sold prefabricated residential homes to consumers for his employer was deemed to not qualify for unemployment insurance after his termination.  Miles Homes v. Schloeder, 407 N.W.2d 479 (Minn. App. 1987).  The employee was paid only through commissions.  The Court held that because the employee was paid on a “straight commission basis, directly related to his number of sales, and his contract with Miles provided that he would not be treated as an employee for tax purposes,” he was a direct seller under Minn. Stat. §268.035 and was therefore ineligible for unemployment compensation.
    5. E. FLSA Overtime Wages. Independent contractors, unlike employees, are not subject to the requirements of the Fair Labor Standards Act, including overtime.  See 29 U.S.C. §§ 206, 207.  Similarly, for purposes of the Minnesota statutes, employee is defined as “any individual employed by an employer.”  Minn. Stat. §177.23 (7).
      1. No FLSA Overtime for Independent Contractors. Salespeople who are properly classified as independent contractors are not employees, and therefore are not entitled to overtime pay.  Minn. Stat. §177.25.
      2. Regardless of Classification, No FLSA Overtime for Outside Salespeople.  Even if the salesperson is an employee, for purposes of overtime, there are nineteen exceptions to the term employee, including one for outside salespersons.  A salesperson who conducts no more than 20 percent of his or her sales on the premises of the employer is not covered by the Fair Labor Standards Act.  29 U.S.C. §213 (a) (1); Minn. Stat. §177.23 (7) (6).  Whether an individual is deemed an outside salesperson depends largely on the amount of time expended on certain sales activities at work and what the individual’s “primary duty” consists of.  See Ackerman v. Coca-Cola Enterprises, Inc., 1999 CJ C.A.R. 3840 (10th Cir. 1999); Casas v. Conseco Finance Corp., 2002 WL 507059 *3 (D. Minn. Mar. 31, 2002) (loan originators did not qualify as outside salespersons because the originators spend 80 to 90 percent of the time in the office).
      3. Regardless of Classification, No FLSA Overtime for Motor Vehicle Salespersons.  Motor vehicle sales persons are not subject to the Fair Labor Standards Act requirement for compensation for overtime work. Minn. Stat. §177.25, subd. 3.  This includes “any salesperson, parts person, or mechanic primarily engaged in selling or servicing automobiles, trailers, trucks, or farm implements and paid on a commission or incentive basis, if employed by a nonmanufacturing establishment primarily engaged in selling the vehicles to ultimate purchasers.”  Minn. Stat. §177.25, subd. 3.
      4. III. IMPACT OF STATUS AS Employee OR  Independent Contractor ON LIABILITIES

 

  1. A. Liability.  In general, an employer is vicariously liable for acts committed by an employee that are within the scope of the employee’s employment.  See Laurie v. Mueller, 78 N.W.2d 434 (Minn. 1965).  This can include torts, negligence, and acts in furtherance of the employment.  See Stephen F. Befort, Employment Law & Practice 2d, 17 Minnesota Practice Series §8.2 (2003).

 

Conversely, an employer is not liable for the actions of an independent contractor in most situations, because independent contractors are “not subject to any control or right of control with respect to their physical conduct in carrying out the undertaking.” Urban ex rel. Urban v. American Legion Post 184, 695 N.W.2d 153, 160 (Minn. App. 2005) (quoting Frankle v. Twedt, 47 N.W.2d 482, 487 (1951)).  Therefore, “principals are generally not vicariously liable for the acts of independent contractors.” Id. However, if an agency relationship has been formed, the principal will likely be liable for the individual’s actions, even if the individual is labeled as an independent contractor.  Pastor v. Florey, 2000 WL 388062  *4 (Minn. App. April 18, 2000) (“an independent contractor may be an agent of the hirer for purposes of vicarious liability if there is a fiduciary relationship, and continuous subjection to the will of the principal.”)

 

  1. B. Indemnification. Minn. Stat. §181.790 generally requires an employer to indemnify its employees in certain situations.[4] In addition, there are several other statutes that provide for the indemnification of certain types of employees.[5] Some employees are specifically excluded from indemnification, but typically they are indemnified from individual liability through another means, such as government employees, and employees who are governed by a separate agreement concerning indemnification.  Minn. Stat. §181.790.

 

In contrast, an independent contractor is not an employee and is therefore not indemnified by statute for actions performed, even within the scope of the individual’s duties under the independent contractor agreement.  An independent contractor cannot use an individual liability defense for actions performed in furtherance of the employment relationship or otherwise.

 

IV.       THE HIGH RISKS OF BEING WRONG.

 

In their zeal to obtain the above advantages, many employers misclassify sales (and other) employees as independent contractors.  This can lead to serious consequences such as (often uninsured) liability, penalties, and even criminal offenses.

 

  1. A. Labels May Not Count. If the parties identify, in a contract or otherwise, an individual as an independent contractor, this designation may not survive a challenge if the relationship is actually an employer-employee relationship.  “The labels that the parties give themselves is not determinative; the relationship is determined by the law, not the parties.” Moore Associates, LLC. v. Commissioner of Economic Security, 545 N.W.2d 389, 393 (Minn. App. 1996).

 

  1. B. Penalties. A false declaration that a person is an independent contractor can create a “perfect storm” of insurance, liability, penalties, and even criminal sanctions.  For example:

 

  1. Tax. If the IRS finds that an employer has misclassified an employee as an independent contractor, the employer will be obligated to pay back taxes, as well as interest and potential penalties.  IR-2004-47, April 5, 2004.

 

  1. Benefit Plans. If, as a result of being misclassified as an independent contractor, an individual is not eligible to receive these benefits, the employer risks the disqualification of its benefit plans. This is a potentially catastrophic risk, as it affects all employees and not merely the employee who was misclassified.
  2. Workers’ Compensation. Failure to provide workers’ compensation insurance coverage where required by law can result in substantial financial penalties, including the assessment of $1,000.00 per week of non-compliance for each uninsured employee.  Minn. Stat. §176.181, subd. 3.  In addition, an employer that willfully and intentionally fails to provide such coverage is guilty of a gross misdemeanor.  Minn. Stat. § 176.181, subd. 5.
  3. Deliberate Misrepresentation. In 2005, the Minnesota Legislature enacted a law forbidding misrepresentation by an employer of the employment relationship.  Minn. Stat. § 181.722 (2005).  The law prohibits an employer (1) from misrepresenting the nature of the relationship to any government unit or to its employees, id. at subd. 1, and (2) from requesting or requiring an employee to enter into an agreement that results in misclassification.  Id. at subd. 2.  The statute provides that the nature of the employment relationship is determined by the tests used under applicable workers compensation and unemployment insurance laws. Id. at subd. 3.  Upon violation of this statute, the court shall submit its findings of fact to the commissioner of labor and industry, who will then report the violation to any and all applicable agencies.  Id. at subd. 5.
  4. Fair Labor Standards Act. An employer cannot wrongfully terminate an employee who makes a complaint that the employer is not complying with the Fair Labor Standards Act. Under Minn. Stat. §177.32, an employer will be assessed a fine of $700.00 to $3,000.00 if it is convicted of either wrongfully terminating or otherwise discriminating against an employee.[6] In addition, an employer who does not comply with Minn. Stat. §177.25—including failure to pay overtime to an employee who deserves payment—is guilty of a misdemeanor.  Minn. Stat. § 177.32.  
  5. Unemployment. If an employer makes a false statement knowing it to be false or without a good faith belief as to its correctness in order to prevent or reduce the amount of unemployment coverage to an individual or the payment required by the employer (such as the classification of an employee as an independent contractor to reduce payments), the employer will be subject to a $500 penalty or 50 percent of the reduced unemployment benefits or payment required, whichever is greater.[7] Minn. Stat. §268.184.
  6. “Domino Effect” of Legal Challenges to Worker Classification. An employer’s classification of a salesperson as an independent contractor rather than an employee may be disputed in a number of contexts: audits from tax agencies; claims by workers for workers’ compensation or unemployment benefits; third-party lawsuits where the actions of the worker are sought to be attributed to the putative employee; actions from labor organizations; or audits from pension authorities.  See Robert W. Wood, Defining Employees and Independent Contractors: Don’t Try This at Home!, Business Law Today, at 46 (May/June 2008).  A challenge to a classification in one context may lead to retroactive reclassification by any number of agencies or groups. [8]
  7. Insurance. It should be noted that insurance companies are likely to deny an employer’s coverage (e.g. workers’ compensation, employment practices liability, other liability) relating to an “independent contractor” who was not disclosed as an “employee” at the time of the insurance application; and are even more likely to decline to pay for penalties resulting from improper classification.
  8. V. Factors to Determine Employee v. Independent Contractor.

 

A.        IRS. The IRS applies a twenty-factor analysis to be used as a guide to determine the status of a worker.  IRS Rev. Rul. 87-4.  The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed.  The most important aspect of the relationship is the degree of control exercised by the principal over the individual worker.  The twenty factors are intended to indicate whether the principal has a sufficient degree of control over the worker such that an employer-employee relationship exits.  In general, the greater the control exercised by the principal, the more likely the worker will be found to be an employee.  Id.

B. Minnesota. Minnesota courts will apply factors similar to the IRS factors.  Specifically, courts consider: (1) who has the right to control the means and manner of performance; (2) the mode of payment; (3) who furnishes the material or tools; (4) who controls the premises where the work is done; and (5) the employer’s right to discharge.  Goodnature v. Mower County, 558 N.W.2d 19, 21 (Minn. App. 1997).  The right to control the means and manner of performance generally carries the greatest weight in a determination of the worker’s status.  Id.; see also Speaks, Inc. v. Jensen, 243 N.W.2d 142, 144 (Minn. 1976) (observing that an employee “undertakes to achieve a given result under an arrangement with another who has authoritative control over the manner and means in which and by which the result shall be accomplished” while an independent contractor “agrees to achieve a given result but is not subject to the orders of another as to the method or means to be used.” (internal quotation omitted) (emphasis added)).

Minnesota has also adopted the economic realities tests as a means to determine whether an individual is an independent contractor or an employee.  Pursuant to Minnesota Rule 5200.0221, “all factors must be weighed to determine whether the worker is economically dependent upon the business to which the worker provides services.” (emphasis added).  See also Minnesota Rule 5224.0340 (listing other factors to determine independent contractor status); Minnesota Rule 5224.0330 (discussing the issue of the control of an individual’s performance).

 

VI.       Termination of a Sales Person.

 

A.        At-Will Sale People. Many sales employees hired in Minnesota are subject to at-will employment and can therefore be terminated without cause, unless the employee is subject to a specific contract or one of the many other exceptions to the at-will employment doctrine that may apply to all Minnesota employees (discrimination, retaliation, etc.). See, e.g. Aberman v. Malden Mills Industries, Inc., 414 N.W.2d 769,771 (Minn. App. 1987) (holding that a salesperson’s employment is at-will “unless otherwise agreed between the parties”).

 

B.        Sales People with Contracts.  Many sales people, whether independent contractors or employees, have contracts that determine termination rights and obligations.  Many of these contracts contain “at-will” language, often subject to a notice provision.  Others provide that the relationship cannot be terminated during a set period of time without “cause” (which gets defined differently in virtually every agreement).

 

C.        The Minnesota Sales Representative Act. If the sales person qualifies as a sales representative under this Act, the principal[9] cannot terminate without good cause and compliance with notice requirements, both of which are set out in the Act.  See Minn. Stat. §325E.37.

 

  1. Independent Contractors Only. The Act applies only to independent contractors and not employees.  Minn. Stat. §325E.37, subd. 1 (d).
  2. Definition of Sales Representative. A sale representative under the Act is “a person who contracts with a principal to solicit wholesale orders and who is compensated, in whole or in part by commission.”  Minn. Stat. §325E.37, subd. 1 (d).

3. Exclusions. The definition of a sales representative does not include the following: an employee of the principal; a person who places orders for his or her own account for resale; a person holding goods on consignment for the principal; or a person distributing, selling, or offering goods not for resale.  Minn. Stat. §325E.37, subd. 1 (d).

 

4. Jurisdictional Requirement. The Act only applies to sales representatives (as defined above) who, during at least part of the period of the sales representative agreement, is a resident of Minnesota (or has principle place of business in Minnesota) or whose geographic territory covers all or part of Minnesota.  Minn. Stat. §325E.37 subd. 6.

 

5. Definition of Sales Representative Agreement. A sales representative agreement includes the following types of contracts or agreements: express, implied, oral, written, for a definite period of time or an indefinite period of time, between a sales representative (which may include an entity) and another person or persons.  Minn. Stat. §325E.37, subd. 1 (e).

 

6. Requirements for Termination. The Act applies to the following classes of principals: manufacturers, wholesalers, assemblers, or importers. Minn. Stat. §325E.37, subd. 1.

 

7. Good Cause. The above-mentioned classes of principals may not terminate a sales representative unless the principal has good cause.  Minn. Stat. §325E.37, subd. 2 (a).

 

  1. Written Agreement.  If a written sales representative agreement controls, good cause is defined as a material breach of at least one of the provisions of the written document.  Minn. Stat. §325E.37, subd. 1 (b).

 

  1. Oral Agreement. If there is no written agreement, good cause is established by the sale representative’s failure to substantially comply with the material and reasonable requirements of the principal.  Minn. Stat. §325E.37, subd. 1 (b).

 

  1. Other Inclusions. Regardless whether the sales representative agreement is written or oral, the following other factors may be considered in the determination of good cause: (i) bankruptcy or insolvency of sales representative; (ii) assignment of the sales representative’s assets to a creditor; (iii) the sale representative’s abandonment of the business (under the totality of the circumstances); (iv) the sale representative’s conviction for violating any law relating to the sales representative’s business; (v) any act that materially impairs the good will associated with the principal’s name, logo, or commercial symbol; or (vi) the sale representative’s failure to forward customer payments to the principal.  Minn. Stat. §325E.37, subd. 1 (b) (1) – (6).

 

8. 90 Days Written Notice. The sales representative must have written notice giving the reason for the termination at least 90 days prior to termination.  Minn. Stat. §325E.37, subd. 2 (a) (1).  The reason must constitute good cause, as defined in Minn. Stat. §325E.37, subd. 1 (b).

 

9. Opportunity to Cure. The termination is only valid if the sales representative fails to correct the reason for termination within 60 days of receiving the termination notice.  Minn. Stat. §325E.37, subd. 2 (a) (2).

 

10. Failure to Renew a Sales Representative Agreement. If the principal has good cause not to renew the agreement, the principal must give the sales representative notice as required in Minn. Stat. §325E.37, subd. 2.  If the principal does not have good cause, the principal must still give the sales representative written notice of its intention not to renew the agreement at least 90 days prior to the expiration of the agreement.  Minn. Stat. §325E.37, subd. 3.  However, there is no opportunity to cure if the failure to renew is not for good cause.  Minn. Stat. §325.37, subd. 3.

 

11. Indefinite Time Period.  If the agreement does not specify an expiration date, it will be considered to expire 180 days after notice of failure to renew has been given.  Minn. Stat. §325E.37, subd. 3.  Therefore, if the principal chooses to terminate without cause, it must give at least 180 days notice if the agreement is for an indefinite period.  Minn. Stat. §325E.37, subd. 3.

 

12. Rights upon Termination. A sales representative being paid by commission is entitled to the commissions earned from all sales the representative would have made had termination not occurred either (1) made prior to termination or (2) made prior to the end of the notification period, whichever is longer.  Minn. Stat. §325E.37, subd. 4.

 

13. Goods Not Shipped. Payment of the commissions must be made, whether or not the goods were actually shipped.  Minn. Stat. §325E.37, subd. 4.  However, a governing sales representative agreement could potentially govern whether payment will be made for goods that have not yet been shipped, if the agreement specifically states that these goods will not be includable in the calculation of commissions.  See, e.g. Reiter v. Recall Corp., 542 F. Supp.2d 945 (D. Minn. 2008) (holding that the salesperson was not entitled to a commission on an account secured prior to termination but received after termination when agreement clearly stated that commissions are earned upon receipt of payment).

 

14. Payment. Payment of the commissions is made either in accordance with the sales representative agreement or in accordance with Minn. Stat. §181.145, as both statutes only apply to independent contractors and not employees.  See below.

 

15. Disputes.

 

  1. Brought by Principal.  The sole remedy for the principal who alleges a violation of Minn. Stat. § 325E.37 is arbitration.  Minn. Stat. §325E.37, subd. 5 (a).

 

  1. Brought by Sales Representative. A sales representative is permitted to submit claims to arbitration or to a court of law.  Minn. Stat. §325E.37, subd. 5 (a).

 

  1. Final and Binding Arbitration.  The decision of the arbitrator is final and binding.  Minn. Stat. §325E.37, subd. 5.  See, e.g. A.J. Lights, LLC v. Synergy Design Group, Inc., 690 N.W.2d 567 (Minn. App. 2005).  When a sales representative agreement expressly states that all claims must be brought in arbitration, and when the sales representative agreement is otherwise valid, the agreement to arbitrate trumps the sales representative’s right to bring an action in a court of law.  Id.

 

16. Attorney’s Fees. The arbitrator may award reasonable attorney’s fees and costs to a prevailing sales representative or reasonable attorney’s fees and costs to a prevailing principal, but only if the complaint was frivolous, unreasonable, or without foundation.  Minn. Stat. §325E.37, subd. 5 (b) (4) & (5).

 

  1. VII. COMMISSION DISPUTES.

 

  1. A. Typical Commission Contract Disputes. Although the possible disputes over commission plans and agreements are endless, in this author’s experience, the more common disputes are the following:

1.  Is it a Binding Contract? There may be a difference between an employer/principal’s current commission plan and a binding contractual obligation;

 

2. Unilateral Changes or Errors. Whether the employer/principal has the right to unilaterally change the commission plan, and whether the employer/principal correctly calculated the amount of the commissions – either intentionally or by mistake;

 

3.  When Earned. Whether the commission payments are “earned” at the time of contract with the customer, the time of delivery/invoicing to the customer or the time of payment by the customer;

 

4.  Post-Termination Payments. Whether the sales person has to still be employed or under contract at the time of payment (e.g. quarterly) in order to receive it;

 

5.  Interplay with Other Agreements. Whether the failure to pay commissions bars the employer/principal from enforcing non-compete and other agreements, or the failure to abide by such agreements leads to a forfeiture or commissions.

 

A well drafted employment or commission agreement can anticipate and clarify all of these issues, but they often do not.

 

  1. B. Minnesota Post-Termination Commission Statutes. The payment of commissions (as well as other wages and benefits) after the termination of the employment or independent contractor relationship is governed by Minn. Stat. §181.13, §181.14, or §181.145. An employer/principal is required to pay terminated employees/independent contractors for all commissions and/or wages that the sales person earned prior to termination.  The time limits and penalties change depending on the relationship and the type of separation.  There are three broad categories covered by these statues: (1) Employees who are terminated by the employer; (2) Employees who resign; and (3) Independent contractors who are commission salespersons.
  2. C. Minn. Stat. §181.13: Employees Terminated By the Employer.
    1. Scope. Upon the termination of a sales or other employee, the employer is required to promptly pay the employee any wages and/or commissions due to the employee upon demand.  Minn. Stat. §181.13 (a).
    2. Definition. Minn. Stat. §181.13 applies only to employees and not to independent contractors who are commission salespersons (as defined in §181.145).  See below.  The employee must have been terminated for this section to apply.
    3. Requirements. After terminating an employee under §181.13, the employer must pay any wages or commissions actually earned by employee and unpaid at the time of discharge within 24 hours.  Payment must occur at the usual place of payment unless requested by mail by the employee.  Minn. Stat. §181.13 (a) & (b).
    4. Wages Include Bonus Payments. In a case of first impression, the Minnesota Court of Appeals addressed the issue of whether an employee can make a claim for an allegedly earned bonus under Minn. Stat. §181.13 in Kvidera v. Rotation Engineering and Manufacturing Co.,705 N.W.2d 416 (Minn. App. 2005).  Basing its decision on a previous case that held that vacation time constitutes “wages” (Brown v. Tonka Corporation, 519 N.W.2d 474 (Minn. App. 1994)), the Court held that an employee’s bonus is considered a wage under Minn. Stat. §181.13.  Employers must pay earned bonuses under Minn. Stat. §181.13 or may face statutory penalties for failure to pay after proper demand.
    5. Wages May Include Paid Time Off and Vacation Pay. In Lee v Fresenius Medical Care, Inc., 741 N.W.2d 117, 127 (Minn. 2007) the Court held that “paid time off or vacation pay constitutes wages for purposes of §181.13 (a)” and are therefore part of the calculation of earned wages.  However, an employee is entitled to these wages only if they are due under governing contract terms for these benefits. Id. at 127-28 (“Under Minn. Stat. §181.13 (a), the vacation wages that an employee has actually earned are defined by the employment contract between the employer and the employee and cannot be determined through a claim brought under section 181.13 (a)”).
    6. Wages Must Have Been Actually Earned at the Time of Termination. Minn. Stat. §181.13 requires payment of “wages or commissions actually earned” at the time of termination.  Minn. Stat. §181.13 (a).  Whether or not wages or commissions have actually been earned is governed by the employment contract.  See, e.g. Reiter v. Recall Corp., 542 F. Supp.2d 945 (D. Minn. 2008) (holding that the salesperson was not entitled to a commission on an account secured prior to termination but received after termination when agreement clearly stated that commissions are earned upon receipt of payment).
    7. Penalties. Failure to pay any earned wages and/or commissions to an employee within 24 hours will result in penalties to the employer.  The penalties shall be equal to the average daily earning of the employee for each day in default for up to 15 days.  Minn. Stat. §181.13 (a).  However, there is no statutory definition of what constitutes the “average daily earning” of an employee under Minn. Stat. §181.13 and no case law could be located to date on this issue.  Minn. Stat. §181.145 applies to  independent contractors and provides for payment to the individual in the amount of 1/15 of the salesperson’s commissions earned through the last day of employment not yet paid for 15 days.  Yet it is uncertain whether this calculation will apply to the penalties under Minn. Stat. §181.13.
    8. Equitable Remedies. Under Minn. Stat. §181.171, subd. 1, an employer who has been found to violate Minn. Stat. §181.13 shall also be liable for compensatory damages and other appropriate relief including but not limited to injunctive relief.
    9. Attorneys Fees and Costs. Attorneys fees and costs are recoverable when an employer is found to have violated Minn. Stat. §181.13.  “The court shall order an employer who is found to have committed a violation to pay to the aggrieved party reasonable costs, disbursements, witness fees, and attorney fees.”  Minn. Stat. §181.171, subd. 3; Galbraith v. U.S. Premise Networking Services, Inc., 2003 WL 23691204 *1 (D. Minn. 2003) (stating that “Minn. Stat. §§ 181.13 and 181.171 provides that reasonable attorney’s fees and other costs shall be payable to an employee upon a showing that the employer violated the provision of Minn. Stat. § 181.13 by not promptly paying earned commissions and salaries at the time of an employee’s termination”).[10]
    10. D. Minn. Stat. §181.14: Employees Who Resign.
      1. Scope. Minn. Stat. §181.14 applies to sales and other employees who quit or resign from employment.  It does not include independent contractors or employees who have been terminated by the employer.
      2. Requirements. The employer is required to pay the employee in full all wages and/or commissions actually earned by the employee no later than the first regularly scheduled payday following the employee’s last day of employment.  Minn. Stat. §181.14 subd. 1 (a).
      3. Exception. If the next payday occurs within five days of the employee’s last day of work, the employer is permitted to delay full payment until the second regularly scheduled payday, provided that it is not twenty total days after the employee’s last day.  Minn. Stat. §181.14, subd. 1 (a).
      4. Penalties. If the employer does not pay the earned wages and/or commissions at the next regularly scheduled payday, the employee may demand the wages within 24 hours.  If the wages still are unpaid, the employee is liable for the average daily earnings of the employee for up to 15 days of non-payment, in addition to the wages actually earned.  Minn. Stat. §181.14, subd. 2.  Similar to Minn. Stat. §181.13, the statute does not define “average daily earnings” and there is no case law to date concerning this issue.  Minn. Stat. §181.145 explicitly provides for payment to the individual in the amount of 1/15 of the salesperson’s commissions earned through the last day of employment not yet paid for 15 days.  However, this applies only to independent contractors and it is unclear whether such a penalty would be imposed under Minn. Stat. §181.14.
      5. Equitable Remedies. Under Minn. Stat. §181.171, subd. 1, an employer who has been found to violate Minn. Stat. §181.14 shall also be liable for compensatory damages and other appropriate relief including but not limited to injunctive relief.
      6. Attorney’s Fees and Costs. Attorneys fees and costs are recoverable when an employer is found to have violated Minn. Stat. §181.14.  “The court shall order an employer who is found to have committed a violation to pay to the aggrieved party reasonable costs, disbursements, witness fees, and attorney fees.”  Minn. Stat. §181.171, subd. 3.
      7. E. Minn. Stat. §181.145: Independent Contractor Salespersons.
        1. Scope. Minn. Stat. §181.145 applies to independent contractor commission salespersons.  A commission salesperson is an independent contractor who is paid on the basis of commissions for sales and is not covered under §181.13 or §181.14 (since the sales person is not an employee).
        2. Definition. A further definition of what constitutes a commission salesperson is located in Minn. Stat. §325E.37 as follows: “a person who contracts with a principal to solicit wholesale orders and who is compensated, in whole or part, by commission.”  See Midwest Sports Marketing, Inc. v. Hillerich & Bradsby of Canada, Ltd., 552 N.W.2d 254 (Minn. App. 1996) (applying the §325E.37 definition to determine whether the individual was a commission salesperson).[11]
        3. Representative Company Qualifies as Person under Minn. Stat. §181.145. In McClure v. Davis Engineering, LLC, 716 N.W.2d 354 Minn. App. 2006), the principal challenged the interpretation of the word “person” in Minn. Stat. §181.145 and whether a “commission salesperson” can include a corporation.  The Court held that while Minn. Stat. §181.145 does not define the word person, the statute does not limit the interpretation of the word to only “natural persons.”  Therefore, a “commission salesperson” can include a Subchapter S corporation (and presumably other entities) under Minn. Stat. §181.145.
        4. Prompt Payment. A commission salesperson under §181.145 is entitled to prompt payment of all commissions earned through the last day of employment.
        5. If Terminated. When a commission salesperson covered under this section is terminated, the principal is required to pay commissions earned through the last day of employment on demand no later than three working days after the salesperson’s last day of work.  Minn. Stat. §181.145, subd. 2 (b).
        6. If Resigned Without Five Days Written Notice. When a commission salesperson resigns with less than five days written notice to his or her principal, the principal is required to pay commissions earned through the last day of the relationship no later than three working days after the salesperson’s last day of work.  Minn. Stat. §181.145, subd. 2 (b).
        7. If Resigned With More Than Five Days Written Notice. When a commission salesperson resigns with more than five days written notice, the principal is required to pay all commissions earned through the last day of the relationship on demand no later than six working days after the last day of work.  Minn. Stat. §181.145, subd. 2 (c).
        8. Commissions Earned After Termination. Minn. Stat. 181.145, subd. 5 allows a commission salesperson to receive commissions earned before termination but not received until after the date of termination.  Whether a commission has been earned at the time of termination is highly influenced by any commission agreement.  For example, if a commission agreement clearly states that a commission is not earned until the third party renders payment, then the salesperson is not entitled to the commission when it was received after termination; and may not even be entitled to it ever. See Reiter v. Recall Corp., 542 F. Supp.2d 945 (D. Minn. 2008) (ultimately deciding that salesperson was an employee but holding that the salesperson was not entitled to a commission on an account secured prior to termination but received after termination when the agreement clearly stated that commissions are earned upon receipt of payment).
        9. Commissions Must Actually Be Earned at the Time of Termination. In Ehlen v. Hanratty & Associates, Inc., 2009 WL 3255399 (Minn. App. Oct. 13, 2009), an independent contractor who sold insurance for employer was terminated and made a claim for payment of earned commissions under Minn. Stat. §181.145.  There was no contract between the parties which specified how or when commissions were earned by the independent contractor.  A dispute arose as to whether the independent contractor had actually “earned” the claimed commissions at the time of termination.  The independent contractor claimed that customers with whom he had spoken prior to the termination, but which did not buy an insurance policy under after his termination, constituted earned commissions under Minn. Stat. §181.145.  In addition, some customers had purchased insurance policies with the independent contractor but had not retained the insurance for a minimum of twelve months by the time of termination.  The Court held that because Minn. Stat. §181.145 mandates that merchandise must have been accepted by the customer for a commission to be earned, and because it was “unclear whether the customers would continue to accept the policies after the [independent contractor] was terminated because they could decline to pay the monthly policy premiums at any time during the policies’ twelve-month period,” the commissions were not earned for purposes of Minn. Stat. §181.145.  The independent contractor’s claims for earned commissions were denied.

10.  Penalties Imposed.

  1. Non-prompt Payment. If an principal fails to pay the commission salespersons his or her earned commissions, the principal is liable for a penalty for each day (not to exceed 15 days) which the principal is late in making the full payment to the salesperson, in addition to the full amount of the commission.  Minn. Stat. §181.145, subd. 3.
  2. Amount.  The penalty imposed on the principal who fails to pay is an amount equal to 1/15 of the salesperson’s commissions earned through the last day of the relationship, but not yet paid.  This means that after 15 days, the principal will be liable for twice the amount of the commission earned.  Minn. Stat. §181.145, subd. 3.
  3. Exceptions to Penalties.
  4. Time to Audit. When the salesperson was engaged in collection, disbursement, or handling of money or property, the principal has an additional ten working days after termination (to audit and adjust accounts).  During these ten days, penalty for non-payment will not be imposed.  Minn. Stat. §181.145 (2) (d).
  5. Commissions Earned After Termination. Non-prompt payment of commissions earned after termination are not subject to penalty.
  6. Amount of Commission in Dispute. When the amount of the commission is in dispute, the penalties will not apply when the principal pays in good faith the amount it believes it owes the commission salesperson.  However, if later adjudicated and the principal was incorrect, the penalties will apply retroactively.   See below.
  7. Attorney’s Fees and Costs when Commission in Dispute. If a principal fails to pay earned commissions to the commission salesperson promptly because (1) the payment was never made or (2) the principal paid the incorrect amount, and it is later determined that the salesperson was entitled to the unpaid portions of the commission, the principal will be liable for the salesperson’s reasonable attorney’s fees and costs.  Minn. Stat. §181.171, subd. 1.
  8. Dougan v. Niedermaier, 419 N.W.2d 112 (Minn. App. 1988). On appeal from the trial court’s decision, the Minnesota Court of Appeals addressed two issues: (1) payment of commissions contingent on a release of future claims and (2) payment of attorney’s fees.  The principal in Dougan offered its terminated salespersons prompt payment of all earned commissions if the salesperson would sign a release, which would absolve the employer of all future claims for commissions.  The salesperson refused and payment was not made.  Over the next four months, the principal failed to pay the earned commissions.  The trial court determined that the salesperson was entitled to all earned commissions but did not impose any penalties or attorney’s fees.  The Court of Appeals reversed, stating that the principal’s noncompliance with Minn. Stat. §181.145 “results in penalties to be paid appellant thereby making appellant the prevailing party in this matter.  As prevailing party, appellant is entitled to attorney’s fees.”  Id. at 115.  Even though the employer offered to pay the same amount in commissions that the salesperson ultimately received (before penalties), the Court imposed penalties and attorney’s fees because a principal cannot make prompt payment contingent upon any release of future claims. Id.

 

 

  1. VIII. Non-Compete and Confidentiality Issues.

 

It is beyond the scope of this article to address the details of business protection  agreements. However, it should be noted that individuals in sales are often required to enter into non-compete, confidentiality, non-solicitation and other protective agreements, often have opportunities to move to the competition, and are often the subject of litigation relating to their departures.  The parties need to know the claims and defenses that may be asserted, which are summarized below.[12]

 

  1. A. Potential Claims.
  2. Breach of Contract. Breach of contract is the first of many claims that former employer (“OLDCO”) can bring to recover for violation of a non-compete agreement.

 

  1. Tortious Interference with Contractual Relations / Prospective Business Relations. If the new employer (“NEWCO”)  hires an employee who is under a non-compete, NEWCO may be liable for damages and attorney fees.

 

  1. Breach of Confidentiality Agreement or Common-Law Confidentiality Violations. Even if there is no non-compete agreement, or if it is unenforceable, a claim for violations of confidentiality may get OLDCO the same results.

 

  1. Respondeat Superior. NEWCO may be liable if OLDCO can show that the employee acted within the scope and in furtherance of his employment at NEWCO in violating the non-compete agreement.

 

  1. Trade Secret Misappropriation. OLDCO may be able to protect information about its customers on the ground that such information is a trade secret

 

  1. Violation of Patent Rights. OLDCO may have a claim against an employee’s patent rights in the presence of an express contract concerning the ownership of patent rights or if the employee was hired specifically for the purposes of invention.

 

  1. Breach of the Duty of Loyalty. An employee’s duty of loyalty extends to a prohibition on soliciting the employer’s customers for the employee’s benefit  or from otherwise competing with his or her employer while employed.  This duty exists regardless of whether an employee has a non-compete agreement with the employer.  However, it is not a violation of the duty of loyalty to  merely prepare to enter into competition with the employer.  There is currently no bright line between prohibited competition and permissible preparation to compete.

 

  1. Breach of Other Fiduciary Duties: Usurpation of Corporate Opportunity; Solicitation of Former Employees. Partners in partnerships, and officers, directors and shareholders in close corporations owe even higher fiduciary duties to OLDCO, including a duty not to usurp a corporate opportunity.

 

  1. B. Potential Defenses. Non-compete agreements in the employment context are generally disfavored.  They are partial restraints of trade and, therefore, are disfavored by courts and will be narrowly construed.  Several defenses have developed over the years.

1. The Agreement is Unreasonable or Unnecessary. In Minnesota, an enforceable non-compete agreement must be both necessary to safeguard the employer’s protectable interests and reasonable as between the parties.  The agreement must not impose any greater restriction on the employee than is necessary to protect the employer’s business.

 

2. Time Restraint is Overbroad. Employment-related non-compete agreements must be reasonable in their temporal scope, or they will not be enforced.

 

3. Territory Too Large. Employment-related covenants restricting competition must be reasonable from a geographic standpoint as well, or they will not be enforced. However, recent cases have held that customer restrictions may substitute for or complement a geographic restriction.

 

4. Lack of Consideration. Signing a non-compete agreement at the inception of the employment relationship provides sufficient consideration to support the covenant.  However, ongoing employment is not valid consideration.  Where a non-compete agreement is executed after an employee has commenced employment, the agreement must be supported by “independent consideration” to be enforceable.  Even if an employee has not physically begun to work, but has already accepted an offer of employment, a non-compete agreement following the original offer of employment generally cannot be enforced absent independent consideration.

 

5. The Consideration Must Be Real. Independent consideration consists of real benefits that are bargained for between the employee and the employer.  “Real benefits” include benefits beyond those to which the employee is already entitled to by virtue of employee status or a separate contract, such as enhanced compensation or benefits packages.  A promotion to a management position with increased authority and responsibility is generally viewed as adequate consideration.

 

6. The Agreement Is No Longer Binding. Non-compete obligations, as drafted, may not survive termination of an employee’s employment or expiration of the employment agreement.  Also, the language in particular contracts may require the employee’s consent to an assignment, in order for the restrictive covenant to be enforceable by an assignee of the former employer.  In addition, employers often draft merger clauses in subsequent agreements – for example, a separation agreement or release of claims – that by their terms supersede and, thus, render unenforceable, an employee’s continuing non-competition obligations.

 

7. OLDCO Breached. If OLDCO materially breached an employment contract with the employee, the non-compete agreement may be defeated.  In the sales context, employers who breach their commission obligations may well render their non-competes unenforceable.

 

8. OLDCO Waived. If OLDCO failed to enforce non-compete agreements against other similarly positioned employees, OLDCO may have waived its right to future enforcement of the agreement.

 

9. Other Contract Defenses. Legal contract defenses, such as fraudulent inducement and misrepresentation, can be asserted as defenses to non-compete agreements.

 

10. Equitable Defenses. Since employers are usually seeking an equitable remedy from the courts (injunction, etc), equitable defenses may apply, such as the equitable defense of “unclean hands.”

 

11. OLDCO Did Not Keep Its Secrets Secret.  The entity seeking protection of the trade secret must make a “reasonable effort under the circumstances” to maintain secrecy. If it did not, it may well not be a protectable trade secret.

 

  1. IX. Conclusion.

 

Sales people and their hiring/retaining employers/principals often overlook the fact that they have contractual, statutory and other business and legal issues unique to the sales force.  This can – and often does – lead to misunderstandings, conflicts, and disputes over both money and customers.  The parties are advised to focus on their unique business relationships and their contractual and legal rights, risks and obligations before, and not after, problems develop.

 


[1]Many thanks to Emily C. Johnson (J.D. candidate 2010, Hamline University School of Law) for her superb work in helping the author research and prepare this article.

 

[2]This article does not address non-employment-related issues, such as corporate, licensing, reporting and taxation issues.  It also does not address many general employment laws that cover all employees.

[3]A direct seller is defined as a person who: (i) “is engaged in the trade or business of selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis which the Secretary prescribes by regulations, for resale (by the buyer or any other person) in the home or otherwise than in a permanent retail establishment, (ii) is engaged in the trade or business of selling (or soliciting the sale of) consumer products in the home or otherwise than in a permanent retail establishment, or (iii) is engaged in the trade or business of the delivering or distribution of newspapers or shopping news (including any services directly related to such trade or business), substantially all the remuneration (whether or not paid in cash) for the performance of the services described in subparagraph (A) is directly related to sales or other output (including the performance of services) rather than to the number of hours worked, and the services performed by the person are performed pursuant to a written contract between such person and the person for whom the services are performed and such contract provides that the person will not be treated as an employee with respect to such services for Federal tax purposes.”  28 U.S.C. §3508.

[4]The employer is specifically obligated to “defend and indemnify its employees for civil damages, penalties, or fines claimed or levied against the employee, when the employee was acting in the performance of the duties of the employee’s position; was not guilty of intentional misconduct, willful neglect of the duties of the employee’s position, or bad faith; and has not been indemnified by another person for the same damages, penalties, or fines.”

 

[5]For example, under Minn. Stat. §302A.521, employees (including directors and officers) of corporations are indemnified in certain situations.  Minn. Stat. §317.521 provides for the indemnification of directors, officers, and employees of non-profit corporations in similar language as listed above.  Minn. Stat. §322B.699 similarly indemnifies directors, officers, and employees of Minnesota Limited Liability Companies.

[6]An employer will be fined under this statute for terminating or discriminating against an employee if “(1) employee complained to employer that wages were not paid under §177.21 –.435; (2) employee started a proceeding  under or related to §177.21-.435; or (3) employee testifies in any proceeding.  Minn. Stat. §177.32 subd. 2.

 

[7]The employer will also be fined if it deliberately assists an individual in receiving more unemployment compensation than warranted by law.  Minn. Stat. §268.184.

[8] For example, in Vizcaino v. Microsoft, 97 F.3d 1187 (9th Cir. 1996), a group of freelance programmers who had been hired on the understanding that they were independent contractors sought and received employment benefits from their employer after an IRS examination of the employer’s records concluded that the programmers were employees, not independent contractors.  This case clearly demonstrates that interactions between tax agencies and other worker status inquiries are practically inevitable.  “Vizcaino was a civil suit brought by workers.  Yet, the IRS really started Vizcaino.”  Wood, supra, at 48.

[9]The Act does not use the word “principal;” it uses the phrase “manufacturer, wholesaler, assembler, or importer” when referring to the party with whom the individual contracts. The word “principal,” when used in this section, refers to manufacturers, wholesalers, assemblers, and/or importers.

[10] There is authority stating that attorneys fees are not generally awarded for claims brought under Minn. Stat. §181.13 because when “Minnesota statutes authorize fees, language such as “attorney fees” or “counsel fees” is employed.” Anderson v. Medtronic, Inc., 382 N.W.2d 512, 516 (Minn. 1986).  However, as this was decided prior to Minn. Stat. §181.171, it is likely no longer applicable, although it has not yet been overturned.

[11]Although Minn. Stat. §181.145 only applies to independent contractors, the statute refers to the company, corporation, or other entity employing the independent contractor as the “employer.”  Since an independent contractor is not technically “employed,” for clarity here, the word “employer” is replaced with “principal” in this section.

[12]For details and citations on this topic, see Jeffrey B. Oberman, Non-Compete, and Trade Secret Litigation: Claims, Defenses, and Strategies (Employment Law Institute, May 24-25, 2010)

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