How to Calculate Severance Pay for Commission-Based Workers

Severance agreements serve as an effective way to safeguard your organization against wrongful termination claims. By offering a severance package, including a lump sum payment and other benefits, you can encourage departing employees to waive their right to take legal action.

The challenge, however, lies in determining how to calculate severance pay for commission-based workers, such as sales professionals. Should they receive the same type of severance as salaried employees, or should their pay structure dictate a different approach?

In this article, we’ll explore key factors that influence calculating severance for sales staff and other commission-based employees and the various ways to structure these payments.

Before we go into how to calculate severance pay for your commission-based workers, let’s address an important question: Should commission-based employees receive severance at all? 

Legally, severance pay isn’t required. No federal or state law mandates it, meaning it’s entirely up to the employer’s discretion. However, offering severance can be a wise business decision. It minimizes legal risks, demonstrates goodwill, and ensures smoother transitions for departing employees.

Some companies have policies stating that only full-time W-2 employees qualify for severance, excluding independent contractors (1099 employees), part-time workers, and some hourly employees. Since many sales professionals work as 1099 contractors, some organizations opt not to provide them with severance pay.

Beyond legal protection, severance agreements can enhance an organization’s reputation. A company that offers severance to commission-based employees shows that it values its workforce, even under challenging circumstances. This, in turn, can make the company more attractive to future hires, who may view it as a stable and supportive employer.

We strongly recommend pairing severance payments with outplacement services. This combination reduces the risk of lawsuits and supports former employees in finding new opportunities—showing them that their contributions were valued, even if their departure wasn’t their choice.

Providing severance can also help maintain morale among remaining employees. When a company lets go of workers without any support, it can create anxiety and uncertainty within the organization. Employees who see their colleagues treated fairly and given resources to move forward are more likely to remain engaged and productive.

If you’d like more guidance on calculating severance pay for commissioned employees, click below to download our free, easy-to-use severance pay calculator to help you make informed decisions while ensuring fairness and compliance.

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Trying to figure out how much severance pay to offer? This simple calculator can help you find the right amount of severance pay based on industry standards.

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Typically, severance payments are determined by the employee’s salary and tenure at your organization. For commission-based workers, however, various ways to make severance payments give your organization different options to explore what works best. Three common methods are to use industry averages, rely on the individual’s earnings history, or take their peak performance months as a calculation baseline. 

Let’s examine each of these methods for commission-based employee severance calculation in detail.

One method for determining severance for commission-only workers is to use a standard salary benchmark for the role. For example, suppose a medical sales representative typically earns around $100,000 annually. You can break that down into monthly earnings (about $8,300) and apply a tenure-based formula to determine their severance pay.

The drawback? Your salesperson’s actual earnings may differ from the industry average. If their pay structure doesn’t align with these benchmarks, you could end up overpaying or underpaying them. While this approach offers simplicity, it may not always be the most precise or cost-effective solution.

Additionally, this method may not reflect the unique structure of your sales team. Some industries experience wide fluctuations in commission earnings based on seasonal trends, economic conditions, or the complexity of sales cycles. For instance, a sales representative working in enterprise software may close only a few high-value deals per year, making their annual earnings highly variable.

A more tailored approach is to calculate severance pay for commissioned employees based on each employee’s actual earnings. This involves reviewing their average income over a set period (e.g., the past 12 months) and using that figure to determine their severance pay.

This method is more accurate than relying on industry averages, as it reflects the employee’s actual contributions. Additionally, it prevents overpaying severance when laying off multiple sales staff members with varying earnings levels.

To ensure fairness, companies can calculate the average earnings over different time frames. Some organizations prefer using a three-year average, especially if the salesperson had a particularly strong or weak recent year. This approach smooths out inconsistencies and provides a balanced perspective on the employee’s true earning potential.

When using this method, it’s essential to clearly define which earnings count toward severance calculations. Are bonuses included? What about incentives for hitting specific sales targets? Establishing these guidelines beforehand can help prevent confusion and disputes.

Important: When determining severance for commission-only workers, it’s crucial to account for unpaid commissions and bonuses. This way, you’ll ensure that the severance package reflects the employee’s total compensation without leaving anything behind.

Sales performance often fluctuates, with some months yielding higher commissions than others. Instead of averaging across all months, some companies calculate severance pay for commissioned employees based on their highest-earning months.

This approach ensures that the severance package reflects the employee’s strongest performance periods rather than penalizing them for slower months. By selecting their best months as the baseline, you can offer a fairer representation of their earning potential.

However, using peak months can sometimes create challenges. For example, if a salesperson had one exceptional month due to a large, one-time deal, basing severance on that figure might not be sustainable for the company. To mitigate this, organizations can take the average of the employee’s top three or six months instead of just one.

Employers should also consider the potential for inflated expectations. If a salesperson believes their severance pay should be based only on their best earnings, they may feel short-changed if the calculation incorporates a broader dataset.

When determining how to calculate severance pay for commission-based workers, companies have multiple options:

1. Using industry salary benchmarks

2. Calculating based on the employee’s actual earnings

3. Basing severance on their top-performing months

While there’s no legal requirement to offer severance, doing so can provide legal protection and demonstrate goodwill toward departing employees. Regardless of your chosen approach, it’s essential to consult your legal team to ensure compliance with all relevant labor laws.

Beyond the financial aspect, severance packages are key to maintaining a company’s brand reputation. Organizations that handle layoffs with care are more likely to receive positive feedback on employer review platforms, which can influence future hiring and business relationships.

Commission-based employee severance calculations require careful planning to ensure fairness and sustainability. By assessing different methods and selecting the most appropriate one for your business, you can create a severance policy that protects your company and workforce.

At Careerminds, we believe that you can never be too prepared for your next reduction in force event. Our arsenal of resources, templates, guides, and industry-leading outplacement services can help you navigate the delicate process. Click below to speak with our experts and see if we are the right partner for your organization.

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Rafael Spuldar

Rafael is a content writer, editor, and strategist with over 20 years of experience working with digital media, marketing agencies, and Tech companies. He started his career as a journalist: his past jobs included some of the world's most renowned media organizations, such as the BBC and Thomson Reuters. After shifting into content marketing, he specialized in B2B content, mainly in the Tech and SaaS industries. In this field, Rafael could leverage his previously acquired skills (as an interviewer, fact-checker, and copy editor) to create compelling, valuable, and performing content pieces for various companies. Rafael is into cinema, music, literature, food, wine, and sports (mainly soccer, tennis, and NBA).