This is part of a “hands on guide” to assist you in the legal discipline and discharge of employees as presented by Fort Wayne Business Attorney Loren Allison, covering the following topics & more! Download your copy by clicking here (PDF)
POST-TERMINATION EMPLOYEE BENEFITS
The employee benefits law is a complex and highly regulated subject, encompassing such matter as wages, vacation pay, bonuses, sales commissions, qualified retirement plans, employer-provided insurance, and other fringe benefits. An employer who is not alert to the employee benefit implication of termination of employment can be exposed to considerable liability.
For purposes of our discussion, “employee benefits” is a broad scheme, encompassing wages, vacation pay, bonuses, sales commission, qualified retirement plans, employer provided insurance, and other fringe benefits. Some employee benefits are pervasively regulated. Wages are subject to federal minimum wage and overtime requirements and state wage claim laws.
Qualified retirement plans, as well as employer-provided insurance and other “welfare benefits plans,” are governed by ERISA-the Employee Retirement Income Security Act of 1974, and a never-ending parade of amendments, such as CORBA. Some vacation or bonus plans are subject to ERISA, while others are not. The courts in Indiana and other states have created common law rules regarding vacation pay, bonuses, sales commissions, and other such benefits in the absence of federal or state statutory regulation.
1. Payment of Wages
First, when must a company pay a terminated employee their final wages? In Indiana, the answer is relatively straightforward. An employer must pay a quitting or terminated employee the wages or salary due him/her on or before the next regular pay day for the pay period in which the separation from employment occurred. Failure to pay the total amount when due exposes the employer to a claim under Indiana’s wage claim laws. A wage claim may be brought by the employee and may be processed through the office of the Indiana Commissioner of Labor. Under the wage claim statutes, the employee may recover the unpaid wages, plus liquidated damages up to double the amount of wages due and treble damage recover–plus attorney fees.
2. Vacation Pay
A second issue concerns vacation pay. For companies which provide paid vacations but have no formal written vacation policy, under the common law developed by the Indiana courts, vacation pay is considered to accrue, and in the absence of a specific policy to the contrary, a terminating employee is entitled to a pro rata share of accrued, but as yet unpaid, vacation pay.
The same Indiana court decision which determined that vacation pay accrues also rules that claims for vacation pay are subject to the wage claim statutes. Therefore, an employer who fails to pay accrued vacation pay to a terminated employee is liable to the employee not only for the unpaid vacation pay, but also liquidated damages up to double the amount of vacation pay due, plus attorney fees.
It is important to note that this common law rule applies only when there is no established policy to the contrary. An employer may avoid the imposition of this rule if it adopts a vacation pay policy which provides that vacation pay does not accrue and that an employee is entitled to vacation pay only if they are employed on their anniversary date. In order to be effective, such a policy should be in writing and should be communicated to all employees, preferably either as part of a contract of employment or in a personnel or employee manual.
3. Sales Commissions
It is safe to say that any unpaid sales commissions derived from sales which were final and for which a company receives payment from the customer are due as compensation. These amounts, as well as any unpaid salary, are governed by the wage claim statutes previously discussed. More interesting questions arise with regard to commissions relating to sales which were “in the works” but not yet closed or paid for, by the date the employee’s employment was terminated. For example, assume that a salesperson had been negotiating a sale, but the customer did not submit its purchase order until after the salesperson was terminated. Is the salesperson entitled to a commission on this sale? Most likely not in Indiana, but courts have been known to do strange things. A written policy or agreement would remove any doubt.
What if the customer had submitted its order and the company had accepted it but neither shipment nor payment had occurred prior to the salesperson’s termination? In the absence of a written agreement, the general rule is that a salesperson is entitled to commission on a sale when the order is accepted by the employer, thus, the employee would be entitled to a commission on this sale. This general, court-imposed rule may be altered by a written agreement or by a clear practice which unambiguously demonstrates a different compensation scheme. I urge you not to attempt to rely upon past practice to avoid commission liability, but rather to reduce your commission program to writing.
What about an employer who pays its salesperson a specified minimum salary as an advance, or “draw” on commission: May the employer recover advances from a terminating salesperson when the advances exceed the commissions actually earned by the salesperson? The majority rule, followed in Indiana, is that the employer may not recover excess advances from an employee in the absence of an express or imposed agreement or promise to repay any excess of advances made over commissions earned. If, however, the employer and employee agree that advances exceeding commissions are deemed loans, they must be repaid.
A final question on the matter of commissions: What if an employer promised to pay a certain advance but when the salesperson is terminated, only pays the amount of commissions actually earned, which is less than the promised advance? The general view is that the employee may sue to recover the promised advance (prorated, presumably, through the date of termination), unless there is a contrary agreement that the employee is only entitled to commissions actually earned. Although there are no Indiana cases on this precise question, it seems likely that the wage claim statutes would apply to such a situation. Again, the lesson is clear–put the terms of the commission arrangement in writing.
If an employer makes a bonus a regular part of its compensation package or specifically offers to pay a bonus, a terminated employee may be able to recover some or all of the bonus in the absence of a specific agreement. Bonus compensation might even be subject to the treble damage and attorney fee provisions of the wage claim statues. Therefore, it is advisable that the employers make clear to their employee that bonuses are discretionary and not a regularly recurring or fixed component of compensation. Employers should also address, in writing, in what circumstances a bonus or partial bonus will be paid on termination of employment.
5. Qualified Plans
When I speak of “qualified plans,” I refer to employer-sponsored retirement and profit sharing plans which qualify for favorable tax treatment. If a plan qualifies, employer contributions to the plan are currently deductible without the participating employees being currently taxed on their interests in the plan, and earnings on plan assets are not taxed until they are actually distributed to a participant. Qualified plans are governed by ERISA.
A brief overview of some issues which arise in the context of the termination of an employee are:
b. Interference with Protected Rights
What if an employee claims he/she was terminated to prevent him/her from becoming eligible to participate in a plan? There do not appear to be any problems under ERISA for ex-employees who were not yet participants when there is a bona fide reason for their discharge. However, employers should be aware that ERISA prohibits an employer from discharging a participant “for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan.”
Accordingly, the lesson which I urge you to take from these examples is that employers increasingly must be able to justify termination decisions to courts, administrative bodies and arbitrators, and must tread lightly in a minefield of legal regulation. Given the complexity of the problems posed by ERISA and the obvious serious consequences of a wrong decision, in a termination where any question of interference with ERISA-protected rights is involved, counsel should be consulted.
6. The “Flip Side” of Employee Obligations
Let’s consider the “flip side” of employee benefits; collection from a terminated employee who “owes” the employer money for tools, uniforms, shortages, and the like. Most employers would like to be able to deduct any amounts an employee owes from the employee’s final paycheck. In such event, an employer should proceed with extreme caution.
An employer cannot deduct amounts owed to it by an employee from his/her wages without a valid, written assignment of wages. In addition to being in writing, the assignment must, by its terms, be revocable at any time by the employee. Moreover, the assignment will be considered valid only if it is made for one of a limited number of purposes specified by law, one of which is the repayment of loans made to the employee by the employer if the loan is evidenced by a written instrument executed by the employee.
In the case of missing tools, your company may not deduct the cost of those tools without a valid wage assignment from the employee. Finally, you should also be aware that it is illegal for an employer to assess a fine against an employee and retain it or a portion of it from the employee’s wages. An employer who violates this law may be fined up to $500.00 plus court fees and attorney fees.
At worst, deduction of the money owed by a separating employee from his final paycheck may be considered an illegal fine. Absent a written wage assignment, it may, at best, be considered an invalid assignment of wages. In either case, an employer is prohibited by Indiana law from making the deduction, and the employee may recover the deducted amount, liquidated damages, and attorney fees under the wage claim laws. Unfortunately, without a valid wage assignment, the employer’s only recourse against the former employee may be a lawsuit to recover the money he/ she owes.
Employers should attempt to avoid this problem by having employees read and execute a checklist and acknowledgment as to company-provided property which must be returned upon termination of employment.
In addition, employees should also be asked to fill out wage assignment forms permitting the employer to deduct the cost of any loaned property which is not returned to the employer from the employee’s final paycheck.
Article by Loren K. Allison, attorney at law
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