Easy Come, Easy Go: State Rules on Post-Termination Forfeitures of Bonuses and Commissions

New York

New York courts treat bonuses, incentive plans, and commissions differently in the forfeiture context. Bonuses or incentive payments may be forfeited under the terms of the compensation plan, but commissions are considered earned wages, which cannot be forfeited. Thus, the key determination is whether the compensation to be forfeited is properly characterized as a bonus, incentive payment, or commission.

Under New York law, earned wages – which are defined to include commissions – are not subject to forfeiture. Bonuses, however, may be forfeited because they are paid at the discretion of the employer. New York law states that an employee’s entitlement to a bonus is governed by the terms of the employer’s bonus plan, and courts in New York have regularly upheld forfeiture where employees left or were discharged from their jobs before a bonus became payable under the employer’s bonus plan. Similarly, compensation owed under incentive compensation plans may be forfeited. Compensation is part of an incentive compensation plan where it is supplemental income based on the employee’s individual achievement as well as overall business performance or other factors outside of the employee’s control.

Whether a particular type of compensation is an earned commission or a forfeitable bonus or incentive compensation turns on various factors. A bonus or incentive compensation must supplement the employee’s base salary. If the compensation plan has ambiguous or contradictory language, or there is conflicting evidence as to the nature of the payments, a question of fact may arise regarding whether the compensation is a bonus or a commission, potentially rendering the forfeiture clause unenforceable.

There are certain steps an employer can take to increase the likelihood that forfeiture provisions in its compensation plans will be enforced:

• The provision should state not only that the employee will not receive the compensation if he or she is not employed on a certain date, but also whether the employee will receive compensation if he or she resigns, is terminated for cause, or is terminated without good cause.
• For commission payments, the employer should state that the commission is not earned or vested until certain specific conditions are met, including that the employer has received payment from the customer and that the employee must be employed on the date of payout (specifying what the date is).
• All employees should sign an acknowledgment that they have read the compensation plan and agree to its terms. Consider having employees initial the forfeiture provision.
• Where a compensation plan includes both bonuses and commissions, distinguish between the bonus portion of the compensation and the commission portion of the compensation, with different forfeiture rules for each.

Taking the steps listed above will increase the likelihood that post-termination forfeiture provisions will be enforced, but even with these precautions, some states will not permit the forfeiture of earned commissions. As an employer grows and expands its ranks to new states, it is crucial to review compensation plans with counsel for compliance.