Is a changed commission structure and reduced pay constructive discharge?

Unless you have a contract promising you a certain commission rate for a particular period of time or for particular accounts, your boss can prospectively, or on a forward-looking basis, change your commission structure. This means that if your employer gives you notice of the rate change, all future sales completed after the notice can be paid at the changed rate. Unless you have an employment contract, oral or written, that spells out the commission structure, it is important to remember that as an at-will employee, you can be let go for any reason (or no reason—legitimate or not) by your employer since all employment is generally at will. And if you can be let go, your employer may legally do something “less than” terminating you—like changing or reducing your pay.

That said, an employer cannot change the rate paid on any sales that were completed before notification of the new rate scale. This would be considered a breach of contract because even though you may not have had a written contract guarantying your rate going forward, for work that’s been done already—such as your sales—you did that work or made those sales under a certain understanding as to what you’d be paid. Since you did your part—you did the work; you made the sales—the company has to honor that understanding and pay you what had been agreed to between the two of you.

Your employer can therefore reduce your pay in the future, but not retroactively. Understandably, you may not want to work for less than you had been making. Of course, you’d also prefer to not be left without any income. So the question becomes: if your pay is reduced, can you quit while still being eligible to receive unemployment benefits? The answer is, you can be IF you were “constructively discharged.” You may also, in some cases, have a claim against your now-former employer for compensation. That then raises the question: what is constructive discharge?

Constructive discharge is when the employer changes working conditions in some way that employment becomes intolerable. Not merely intolerable to you, since you might be unusually sensitive to or concerned about some things; rather, intolerable to the hypothetical average reasonable employee. Essentially, you are forced out by being made to put up with conditions that no one should put up with. So when you resign (i.e., quit), it’s treated as if you were discharged or terminated.

A reduction in pay can result in a finding of constructive discharge, and therefore, for example, eligible for unemployment benefits, if the pay reduction is severe enough—you really cannot live on it—and compels you to resign. But not every reduction in pay, or even most, is considered constructive discharge. Remember: the change—or in this case, pay cut—must be intolerable to the average reasonable person.

Requirements for a Constructive Discharge Claim

Courts look at several criteria to determine whether there is a constructive discharge:

(1) Is the change restricted to that particular individual, or whether an entire group was treated equally?

Most states require that the conditions regarding reduction in pay be isolated to an individual employee rather than being widespread. The theory is that if a company has to cut back on everyone’s pay, they are not creating an intolerable environment for any single employee. Rather, employers are taking an unpleasant but necessary step to (hopefully) save everyone’s jobs.

(2) The change must not a reasonable or legitimate response to the employee’s own behavior or performance.

For example, in terms of a reduction in commission rate, if commissions were lowered because (a) the employee’s sales-to-return ratio was too high, or (b) the employee had to give too many discounts or incentives to get sales, or (c) the employee was not meeting his or her sales goals, not only was the employer acting prudently, but the reduction was appropriate. There is nothing “intolerable” about being treated the way you deserve, based on your performance.

(3) In most states, the cut must ultimately contribute to the employee’s resignation.

The pay cut must be the reason the employee feels they were forced to quit. In other words, the cut in commissions must be so large that the employee can no longer justify or afford to work for the company. Conversely, if the cut is relatively small or manageable–it may require the employee to make some adjustments to his or her spending or possibly work an additional part-time job to supplement his or her income, it is most likely not a large enough cut to justify a constructive discharge claim. “Intolerable” means intolerable or not tolerable: something a reasonable person simply will not tolerate.

(4) What percentage of the employee’s income is commissions? All one-third decreases in commission rate, for example, are not considered equal.

Example: take a 100% commissioned sales representative currently making $120,000.00 per year. A one-third cut in commission will reduce the rep’s pay by $40,000.00, reducing overall commission to $80,000.00.

Now contrast that with a rep who has a base salary of $75,000.00 per year and who then makes another $45,000.00 in commissions, for a total of $120,000.00.

If this second sales rep’s commission is slashed by one-third, he or she loses $15,000.00 in salary and is still making $105,000.00, or 87.5% of their former income.

While no one wants to lose 12.5% of their income, losing that amount is much less intolerable than losing one-third of your pay.

(5) Are there any other conditions occurring in the workplace? For instance, was your boss also verbally abusing you? Remember: the legal requirement is intolerable.

Examples that the courts have held as intolerable include placing employees on permanent unpaid medical leave, excessive decrease in work hours, excessive increase in job tasks or work hours (especially in the case of salaried staff, who do not receive additional pay for the additional hours), and violence in the workplace. If extreme enough, these conditions could themselves potentially give rise to a constructive discharge claim; or they could bolster a claim based primarily on a cut in commissions. Losing 20 – 25% of your commissions is one thing; losing it while working longer hours and putting up with abuse is another, even worse, thing.

Taking Action

Most states require that employees give their employer notice of the intolerable condition and a chance to fix it. If your employer is entirely unaware that your commission cut is intolerable to you, then you don’t have much of a case that the reduction was intentional or permanent. (The theory is, if you told the employer this created a problem for you, they might have reversed, or at least ameliorated, the cut.  But if you never tell them it’s an issue, they have no reason to do anything.)

When giving your employer notice, make sure that the notice is in writing and that you keep a copy for yourself as well. Keep the letter respectful and only state facts, not accusations. Remember that being fired from your job for insubordination (e.g. being insulting to management) will prevent you from receiving unemployment benefits.

Possible Considerations for a Constructive Discharge Claim

It is important to determine whether you are, in fact, an employee of the company or an independent contractor. Many modern sales positions utilize an independent contractor model where the company only hires independent contractors who are each treated as if they are their own business; many “outside” sales reps, especially if they are commission-only (no base pay) are independent contractors. If this is the structure, then you have absolutely no employment claims at all—including for constructive discharge—because you are not an employee of the company, but rather the company is your client. Only employees have wrongful termination or constructive discharge claims.

Also, while it’s good to have a constructive discharge claim, it’s better to have a breach of contract claim, since breach of contract claims are less subjective and easier to establish. (Is there a contract? If there is, did the company not do what the contract said? If so, they breached the contract.) Review any documents, paperwork, agreements, etc. you have with the company. If they put your commission rate into a one-year agreement, for example, and that agreement has not yet expired (that is, the year is not yet up), they cannot change your rate until the end of the agreement. If they do, they committed breach of contract. So before relying on constructive discharge, see if you have a different, even stronger, basis for compensation or legal action.

Case Studies: Constructive Discharge and Pay Reduction

Case Study 1: Unfair Pay Cut – John’s Auto Sales

John worked as a sales representative for a car dealership, John’s Auto Sales. Due to financial challenges, the dealership implemented a new commission structure that significantly reduced the commission rates for its sales representatives. John, who heavily relied on commissions for his income, found the pay cut to be financially burdensome.

Feeling that the pay reduction was intolerable, John resigned from his position and filed for unemployment benefits, claiming constructive discharge. This case explores the question of whether the pay cut was severe enough to warrant a constructive discharge claim and the eligibility for unemployment benefits.

Case Study 2: Contractual Protection – GreenTech Software

GreenTech Software was a technology company that provided commission-based incentives for its sales team. Sally, a sales representative at GreenTech, had a written employment contract that guaranteed her commission rate for a specified period. However, the company decided to change the commission structure and reduce the commission rates for all sales representatives, including Sally.

Sally believed that the pay reduction breached her employment contract, and she considered filing a breach of contract claim against GreenTech. This case emphasizes the importance of contractual agreements and their impact on pay reduction scenarios.

Case Study 3: Intolerable Work Conditions – Alpha Corporation

Alpha Corporation implemented a new commission structure that significantly reduced the commission rates for its salesforce. Along with the pay cut, the company also imposed excessive work hours and increased job tasks on the sales representatives. Some sales representatives found the combination of reduced pay and increased workload to be intolerable and chose to resign from their positions, claiming constructive discharge. This case highlights how a pay reduction, coupled with unfavorable working conditions, can contribute to a finding of constructive discharge.