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The Michigan Sales Representative Commission Act: A Costly Trap for the Unwary Business

Many Michigan companies rely on commissioned sales representatives to develop business and maintain client relationships. However, few know that Michigan has enacted specific laws to protect sales representatives when commission disputes arise. If not handled properly, such disputes can lead to substantial damages. In 1992, the Michigan Legislature passed the Sales Representative Commission Act (the “Act”), which, among other things, provides for treble damages (i.e., three times the actual amount of unpaid commissions, up to a maximum of $100,000.00) if a court determines a company has improperly withheld commissions. Because of these significant penalties, any business using a commission salesforce in Michigan should be aware of the Act’s requirements.

The Act Applies to Principal/Representative Relationships

The Act generally applies to all commission-based sales of goods in Michigan where a principal/representative relationship exists. The Act defines a “principal” as any person or entity who either (i) manufactures, produces, imports, sells or distributes a product in Michigan or (ii) contracts with a representative to solicit orders for or sell a product in Michigan. A “sales representative” is any person who contracts with or is employed by a principal for the solicitation of orders or sale of goods and is paid, in whole or in part, by commission. A “commission” is defined as the compensation paid to the sales representative that is expressed as a percentage of the amount of orders or sales or as a percentage of the dollar amount of profits. 

These statutory definitions are not always straightforward, and court decisions and other guidance have provided additional clarification. For instance, a “sales representative” does not include a person “who places an order or sale for a product on his or her own account for resale by that sales representative.” In addition, some courts appear to have expanded the definition of a “principal” – broadening the scope of the Act. In Kenneth Henes Special Projects Procurement v. Cont’l Biomass Indus., Inc., 86 F. Supp. 2d 721 (E.D. Mich. 2000), for example, the federal court for Eastern District of Michigan held that a “principal” includes businesses that either: (1) engage in the sale (or production) of a product in Michigan; or (2) contract with a sales representative in Michigan to procure orders or to sell goods on the principal’s behalf. Such definitions can lead to potentially unlikely results. 

The Act Requires Prompt Payment of Commissions

The Act requires a principal to pay all owed commissions within 45 days after its relationship with a sales representative ends. This seems simple enough on its face, but determining when commissions are due or owing can sometimes be tricky. Usually, the terms of the contract or commission plan will determine when commissions are due. When there is no written contract or plan, however, courts look to the past practices between the parties. In situations where there are no past practices, the custom for the business that is the subject of the relationship between the parties generally controls. Thus, where the parties do not clearly agree on when commissions will be due, the resultant uncertainty and ambiguity can lead to costly litigation.

The “Procuring Cause” Doctrine

Another legal principle that sometimes comes into play in this area of the law is the “procuring cause” doctrine. If a commission agreement is silent regarding post-termination commissions, Michigan courts can read in certain terms (like the procuring cause documenting) to fill the gap. Under the procuring cause doctrine a commission belongs to a sales representative if the sales representative’s efforts are the “procuring cause” of the sale—even if he or she did not personally conclude or complete the sale. This can be true even if the sales representative is fired before the sale is completed. Moreover, where the contract is silent, commissions are “due” when the customer awards the business to the company, not when payment is received or when the contract is fulfilled. Some courts have interpreted this doctrine to apply when a sales representative has completed substantially all that is required under the terms of his contract. However, if the contract or plan specifically states how commissions are earned, and when they are due, courts generally must follow those express terms and cannot rely upon the “procuring cause” doctrine.   

Given the broad powers courts have to interpret ambiguous agreements, businesses proceed at their own risk when they leave commission agreements silent as to post-termination commissions. Instead, they should consult with counsel to ensure that any tail commissions are resolved in accordance with the intent of the parties at the time the sales-representative relationship begins. 

The Act Includes Large Penalties for Business that Fail to Promptly Pay Commissions

To encourage the prompt payment of undisputed commissions, the Act contains significant statutory damages. The principal obviously would have to pay the actual commissions owed and unpaid. Moreover, where a court finds that the principal “intentionally failed” to pay commissions, it can order the payment of statutory damages equaling twice the amount of the commissions due, or $100,000, whichever is less. Importantly, courts consistently hold that, even if there is a good faith dispute, any failure to pay is intentional unless it results from a mere calculation error. Additionally, if the sales representative prevails in bringing a claim under the Act, the court can order the principal to pay the representative’s costs and attorneys’ fees.

In light of the significant monetary risks that arise under the Act, businesses are well-advised to consult with counsel when evaluating sales representative relationships and creating or maintaining commission or bonus programs.

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