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An employer should not change a commission structure without notice. In the US, a change is generally made prospectively, through a new written plan that reps receive and sign before it takes effect. California and New York require signed written commission agreements (California Labor Code 2751, New York Labor Law 191(1)(c)). Rules vary in other states, and commissions already earned should be paid under the plan in force when they were earned.
Whether a commission plan must be in writing depends on the state. California requires a written, signed commission contract, with a copy given to the employee (California Labor Code 2751). New York requires a written agreement signed by the employer and the commissioned salesperson (New York Labor Law 191(1)(c)). Elsewhere, put every rep's commission agreement in writing anyway: a verbal promise is hard to prove.
However, once a commission structure is set out in a written, signed plan, can the variable compensation plan, commission rates, and its associated criteria be legally modified? Don't forget to consult our sales commission plan guide to go further.
The straightforward answer is yes. Employers frequently need to adjust their commission remuneration agreements for various strategic, operational, and market-driven reasons.
The data demonstrates this reality:
- 46% of organizations believe their current commission structure and payment framework fails to retain top-performing talent. (Primeum, commentremunerer.com and MeteoJob survey)
- 2/3 of sales professionals and commissioned employees consistently miss their annual revenue targets. (Aberdeen Group study)
- 88% of survey participants consider their commission pay system and performance-based compensation requires substantial improvement. (Primeum, commentremunerer.com and MeteoJob survey)
But what legal framework and contractual obligations govern the modification process for commission compensation agreements? Under what circumstances can these contract changes be implemented?
To address these critical questions, this guide covers the California and New York rules, the steps and a sample change letter; it is general information, not legal advice, so have employment counsel review any plan change. Throughout this article, we'll also examine the legal risks and breach of contract consequences companies face when failing to comply with these procedures, as well as employees' contractual rights and legal remedies when disagreeing with proposed commission plan changes. Discover our comprehensive commission plans resources for more insights.
1. When can a commission pay plan be changed?
In California, the terms of the plan in force apply until superseded by a new signed agreement (California Labor Code 2751), so a change starts with a new written plan.
Before changing a plan, check four points:
- The plan's amendment clause: follow any procedure or notice period it sets for changes.
- The states where reps work: California and New York require a signed written agreement; elsewhere, check with employment counsel.
- The effective date: apply new terms from a future date only, and pay commissions already earned under the plan in force when earned.
Any consent clause: if an employment agreement or the plan requires the rep's consent to changes, get it in writing first.
📌 Please note:
If an employment contract or commission agreement includes commission remuneration without defining specific terms, conditions, and payment structure, any modification to the variable compensation structure requires the employee's explicit written agreement to avoid breach of contract claims.
Following these legal principles and contractual obligations, here are common scenarios where employers may legitimately need to modify employee commission agreements on a going-forward basis:
Reorganisation of a team
The commission remuneration component and payment structure of employment contracts may require contractual revision through written amendments when organizational restructuring affects team members' earning potential and commission rates, particularly when the company cannot guarantee maintaining equivalent total compensation levels.
Internal mobility
Contract amendments and commission agreement modifications may be necessary when commissioned employees transfer internally to positions with significantly different revenue potential and commission opportunities, whether higher or lower, than their current commission structure and payment terms account for.
Market developments
Companies can propose commission plan modifications on a prospective basis in response to market evolution and competitive pressures, provided they secure employee agreement through written consent and provide comprehensive details about the changes to commission rates and payment structure. However, without employee consent and written agreement, employers cannot unilaterally adjust variable compensation structures based solely on market conditions.
📌 Please note:
Employers retain the contractual right to award discretionary bonuses to employees. This means companies can distribute performance-based bonuses without incorporating them into employment contracts, creating formal amendments, or executing contract riders, provided they can justify the payment rationale and maintain compliance with wage laws.
2. Modification of the commission remuneration plan: What are the risks in case of non-compliance with legal obligations?
When a company modifies commission plan objectives and payment terms without ensuring they meet legal requirements and contractual obligations, specifically being achievable, predetermined, and communicated to commissioned employees with reasonable notice at the fiscal year's beginning, the organization violates employment law and commits breach of contract, exposing itself to significant legal and financial risks.
In practice, such non-compliance and breach of contractual obligations can result in constructive dismissal claims where affected employees terminate their employment contract citing employer fault. Additionally, companies face potential legal liability for commission remuneration reimbursement, either covering earned wages and earned commissions from previous years or maximum contractual amounts, plus substantial damages, legal fees, and penalties under labor law.
3. Changing commission pay: the steps to follow
When an employer decides to modify employee commission structures and payment agreements, they must provide reasonable notice in writing at the beginning of the fiscal year while ensuring all new commission objectives and rates remain realistically achievable.
These commission plan modifications and contract changes should be incorporated into written employment contracts for all new hires whose compensation includes a variable commission component or performance-based pay.
Regarding commission remuneration changes for current commissioned employees, companies must prepare formal contract amendments reflecting the modified commission agreement and obtain written signatures from all affected beneficiaries to establish mutual agreement and avoid breach of contract.
📌 Please note:
Employees possess the legal right and contractual protection to refuse signing amendments that modify their commission compensation structure or payment terms. In such cases, the employee continues benefiting from their existing commission pay system and contractual rights. While refusal doesn't constitute grounds for dismissal or wrongful termination, employers may pursue alternative legal remedies.
4. Changes to the commission pay plan: what are the possible reactions as an employee?
When employers fail to comply with the previously outlined legal requirements and contractual obligations for commission plan modifications and contract changes, commissioned employees can pursue several legal remedies and breach of contract claims.
Specifically, if commission structure changes negatively impact an employee's total remuneration or earned commissions, the affected individual has the contractual right to:
- Submit their case to the employment tribunal (industrial tribunal) or labor board requesting reinstatement of their original compensation structure and recovery of earned wages.
- Exercise constructive dismissal rights and legal remedies by terminating their employment contract or requesting judicial contract termination based on employer breach.
The final word...
Organizations can legally modify commission compensation plans and payment agreements on a prospective basis provided the revised targets, commission rates, and payment terms meet achievability standards and are communicated transparently to commissioned employees with reasonable notice at the beginning of the fiscal year.
For modified commission structures and contract amendments to maintain legal validity and contractual enforceability and protect companies from potential litigation and breach of contract claims, all changes must be formally accepted by beneficiaries through written agreement and signed contract amendments establishing mutual consent and legal compliance. Learn about common sales commission mistakes to avoid when implementing these changes.
Written acceptance is the legal requirement; keeping the old and the new plan applied to the right periods is the operational one. On Qobra's sales compensation platform, plans are versioned and each payout stays attached to the rules in force when the deal closed.
