Producer Compensation – A Trap For The Unwary

Many of my clients prefer not to go to the trouble of creating a written employment agreement for their producers.  I think it is always better to document the more important aspects of an employment relationship, as memories tend to fade over time and can become “convenient.”  In addition, any restrictions an employer may want to place on the competitive activities of an employee after the relationship ends must be in writing and signed by the employee to be enforceable against the employee.  For this reason, I always advise my clients to have their producers sign restrictive covenant agreements, at a minimum.

A call I received a couple of weeks ago on the Free Legal Service Program that I provide for IIAG members reminded me of another subject that should always be addressed in writing with a producer.   The caller has just terminated the employment of a producer, and the producer had asked about being paid the agreed on share of commissions for the insurance policies that had been sold by her before the date of termination, even for those policies for which the agency had not yet received payment.  The caller had agreed to pay for those policies on which the commission was received during a short time period after the termination date, but after speaking to an attorney, the producer asked to be paid the agreed on share of all the commissions that the agency would receive for those policies regardless of when they might be received.

The caller thought this was unfair since the agency would have to assign another producer to the accounts to handle them going forward and perform the servicing duties that the terminated producer would have otherwise been expected to perform.  Unfortunately, for the caller, under Georgia law, in the absence of an agreement to the contrary, a salesperson is entitled to receive the agreed on compensation for “all sales procured” by him or her before the date their employment is terminated, regardless of when the employer may receive payment for the goods or services sold.   Thus, a producer would be entitled to be paid the agreed on share of the commissions received by the agency for all insurance policies or other products sold by the producer before the date their employment was terminated, in the absence of any agreement to the contrary.

The Georgia courts have established three conditions that must be met before the above rule will apply:

  1. The sale must have been completed (i.e., everything done to entitle the employer to receive payment for the product sold) prior to the employment termination date.  If the employer or employee is required to do anything else to complete the sale, which action has not occurred before the employment termination date, the employee has no right to receive compensation for it.
  2. In addition, if the employer’s right to receive compensation for the sale depends on future actions of the buyer or a third party, which are within the sole discretion of the buyer or such third party, there has been no completed sale, if those actions do not occur before the employment termination date.
  3. If the employer can prove that the employee understood that the right to receive compensation for a sale depended on further actions by the employee after the sale was completed (e.g., the servicing of the account), the employee would not be entitled to receive compensation after the employment termination date for any sales that were completed before that date.

The courts have held that the right of a salesperson to receive compensation after their employment is terminated for work done prior to termination will be governed by any agreement reached on that subject, even if the agreement states that the employee is not entitled to receive any compensation after the termination date.   To avoid the “convenient memory” problem, it would be better if this agreement were documented in some way and that document was signed by the employee.  Otherwise, the content of any agreement reached would be the subject of a “swearing contest” that could only be resolved by a judge or jury, at a cost to the employer in time and money that could have easily been avoided.

I know that many small business people take pride in the fact that they run their businesses using handshake agreements with their employees and others, as it demonstrates they trust the other party to those agreements.  There is nothing wrong with that approach, as long as the business owner understands what can happen if that trust turns out to have been misplaced.  The compensation of producers is one area that can result in unpleasant consequences for an agency owner who runs their agency in that manner.