The law on commission payments for California employees.
What is a Commission, and When Is It Payable?Commission wages are "compensation paid to any person for services rendered in the sale of [the] employer's property or services and based proportionately upon the amount or value thereof." For wages to be commission wages, the employee must be involved in selling a product or service, and the commission earnings must be a percentage of the price of the service or product sold.The right to a commission is based on the terms of the contract. All "earned" commissions are due and payable when they are "reasonably calculable," and are not earned or owed until the contractual conditions have been satisfied. Commissions must be paid twice per month on the employee's designated regular paydays, for both exempt and non-exempt employees.Employers may not attribute commission wages paid in one pay period to other pay periods in order to satisfy California's minimum wage requirements.Signed Written Commissions Contract Required California employers are required to provide commissioned employees with a written contract that sets "forth the method by which the commission will be computed and paid." Employers are also required to provide a signed copy of the contract to the employee and receive a signed receipt for the contract from each employee. This requirement does not apply to: (1) short-term productivity bonuses, (2) temporary, variable incentive payments that increase, but do not decrease under a written contract, or (3) bonus and profit-sharing plans, unless the employer has offered to pay a fixed percentage of sales or profits for the work performed.The agreement should be detailed enough to allow the employee to calculate the commission for any given sale and the date and timing the commission is earned.Employers are permitted to reserve the right to unilaterally change a commissions plan, but may not do so retroactively. If a commissions contract expires and the parties continue to work under its terms, it is presumed to remain in full force until it is superseded or the employment is terminated.Setting Conditions on Earning CommissionsEmployees do not earn the commission until they meet the conditions precedent in the contract. Employers can set conditions, such as the requirement that a customer pay for goods prior to a salesperson earning the commission, or the requirement that a customer keep a particular product for a specific time period.Chargeback on Unearned CommissionsUnder Labor Code § 221, employers may not collect back wages previously paid. Whether a commission chargeback is legal under § 221 depends on whether the commissions are considered earned wages, because earned wages cannot be charged back.Therefore, an employer may advance commissions to an employee, and may legally "charge back any excess advance over [the] commissions earned against any future advance should the conditions not be satisfied." An advance constitutes a payment where, "at the time of payment . . . the employee's right to the commission has yet to occur or its occurrence as yet is otherwise unascertainable." Because all conditions for performance have not yet been satisfied, an advance is not considered a wage, and therefore a chargeback of advances does not violate § 221.Generally, chargebacks must be tied to the sales in which the employee was involved and for which the associate received the commission. That is, the employer cannot deduct losses from an employee's commission advances without establishing that the losses were related to the particular employee's identified sales. Note however that courts have come to a different conclusion where the employee has not been promised a specified bonus or commission based on the employee's "individual sales or managerial efforts," but rather where the commission or bonus is based "on store profits, a factor that necessarily considers the employer's expenses as well as its income."Chargeback on Earned CommissionsCourts have also noted that chargebacks against earned commissions may be permitted under Labor Code 224 where the deduction "(1) is authorized in writing, and (2) does not reduce the employee's standard wage." The standard wage is the employee's base pay.Forfeitures/TerminationCommissions cannot be forfeited once they have been earned. Where the employee is terminated involuntarily, he may be able to recover all or a pro rata share of the commissions on the grounds that he has been prevented from completing his duties. Additionally, a provision denying payment of commissions perfected after an employee's separation (whether voluntary or involuntary) may constitute an unconscionable forfeiture, particularly where there is no justification for the provision. A number of contract cases have held that an employee who is the "procuring cause" of the sale is entitled to the commissions."Similarly, where a commission plan provides that commissions are forfeited if the employee resigns, is reassigned, or is terminated prior to payment of those commissions and also provides that the employer has the "unreviewable right to reassign or terminate an employee at will," then the forfeiture provision would be substantively unconscionable.However, where the separated employee had ongoing duties with respect to the sale, courts are more likely to allow the forfeiture provision. For example, the California Court of Appeal upheld a commissions agreement that terminated the employee's right to receive commissions on payments received 30 days after severance of employment, because the employee had "ongoing responsibilities to 'service' the account once the sale is made."Payment of Commissions Upon TerminationWhen an employee quits employment without advance notice, commission wages that are "reasonably calculable" at the time must be paid within 72 hours of termination. If commissions cannot be calculated as of the time employment is terminated, California law permits an employer to pay commissions after the termination date, as long as they are paid once they can be calculated.____________________________________________________________________________ Cal. Lab. Code § 204.1; Ramirez v. Yosemite Water Co., Inc., 20 Cal.4th 785 (1999) (definition o f commissions in Section 204.1 applies to all employees receiving commissions). Cal. Lab. Code § 204.1; Keys Motors, Inc. v. DLSE, 197 Cal.App 3d 557 (1988); see also Div. of Lab. Stds. Enforcement, Enforcement Policies and Interpretations Manual (June 2002 Rev.), §§ 2.5.4, 34.1.Steinhebel v. Los Angeles Times Communications, LLC, 126 Cal.App.4th 696, 705 (2005).Koehl v. Verio, Inc., 142 Cal. App. 4th 1313, 1335 (2006); DLSE Opinion Letter No. 1999.01.09, p. 2 ("A commission is 'earned' when the employee has perfected the right to payment; that is, when all of the legal conditions precedent have been met. Such conditions precedent are a matter of contract between the employer and employee, subject to various limitations imposed by common law or statute."). Div. of Lab. Stds. Enforcement, Enforcement Policies and Interpretations Manual (June 2002 Rev.), § 5.2.5.Peabody v. Time Warner Cable, Inc., 59 Cal.4th 662, 668 (2014) ("there is no obligation to pay unearned commission wages in any pay period. Commissions are owed only when they have been earned, even if it is on a monthly, quarterly, or less frequent basis."). Cal. Lab. Code §§ 200(a), 204(a); Peabody v. Time Warner Cable, Inc., 59 Cal.4th 662, 668 (2014)("all earned wages, including commissions, must be paid no less frequently than semimonthly" and noting that §204.1 allows monthly pay payment of commissions only for "commissioned car salespersons").Peabody v. Time Warner Cable, Inc., 59 Cal.4th 662, 665, 669 (2014)("Whether the minimum earnings prong is satisfied depends on the amount of wages actually paid in a pay period. An employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall."). Cal. Lab. Code § 2751 (effective January 2013). Cal. Lab. Code § 2751(b). Cal. Lab. Code § 2751(c).Koehl v. Verio, Inc., 48 Cal.Rptr.3d 749, 761 (2006) ("The right of a salesperson or any other person to a commission depends on the terms of the contract for compensation.").Mathews v. Orion Healthcorp Inc., No. C-13-04378 EDL. (N.D. Cal. 2014). Cal. Lab. Code § 2751 (b).Powis v. Moore Machinery Co., 72 Cal. App. 2d 344 (1945).Steinhebel v. Los Angeles Times Communications, LLC, 126 Cal.App.4th 696, 705 (2005) (Court of Appeal upheld telesales agreement under which a sale of a subscription did not qualify as a commissionable order unless the customer kept the subscription for 28 days because the value of employee's services was only realized by employer after customer maintains subscription for 28 day period). Cal. Lab. Code § 221.Koehl v. Verio, Inc., 48 Cal. App. 4th 1313, 48 Cal.Rptr.3d 749, 750 (2006).Koehl v. Verio, Inc., 48 Cal. App. 4th 1313, 48 Cal.Rptr.3d 749, 761 (2006); Agnew v. Cameron, 247 Cal. App. 2d 619, 622 (1967); DLSE Employment Policies and Interpretations Manual (2002 rev.), Section 34.3.1 ( "Computation of commissions frequently relies on such criteria as the date the goods are delivered or the payment is received. Sometimes, the commission of the selling salesperson is subject to reconciliation and chargebacks if the goods are returned. If these conditions are clear and unambiguous, they may be utilized in computing the payment of the commission.").Koehl v. Verio, Inc., 142 Cal. App. 4th 1313, 1332 (2006).Koehl v. Verio, Inc., 142 Cal. App. 4th 1313, 1332 (2006).Koehl v. Verio, Inc., 142 Cal. App. 4th 1313, 1336 (2006); Hudgins v. Neiman Marcus Group, Inc., 34 Cal. App. 4th 1109 (1995).Hudgins v. Neiman Marcus Group, Inc., 34 Cal. App. 4th 1109 (1995) ("unidentified returns policy calls for deductions from earned commission wages of all sales associates a sum of money representing what would otherwise be business losses occasioned by the misconduct or negligence of some of its employees and customers. The deduction is unpredictable, and is taken without regard to whether the losses were due to factors beyond the employee's control"); see also Kerr's Catering Service v. Department of Industrial Relations, 57 Cal. 2d 319 (1962) (unlawful for employer to deduct net amount of cash shortages on food truck out of employee commissions because it was "not caused by a dishonest or willful act or by the culpable negligence of the employee"); Quillian v. Lion Oil Company, 96 Cal. App. 3d 156 (1979) (unlawful for the employer to reduce an employee's promised bonus by shrinkage at a gas station).Prachasaisoradej v. Ralphs Grocery Co., Inc., 42 Cal. 4th 217, 236 (2007) ("Here, unlike in Kerr's Catering, Quillian, and Hudgins, no employee was offered or promised a specified bonus or commission that was based upon, and immediately measurable by, his or her individual sales or managerial efforts, but was then subject to deductions to cover employer costs. Instead, under the ICP, all eligible employees' supplementary incentive compensation was equally and collectively premised, at the outset, on store profits, a factor that necessarily considers the employer's expenses as well as its income")(emphasis in original).Koehl v. Verio, Inc., 142 Cal. App. 4th 1313, 1337 (2006); Korry of California v. Lefkowitz, 131 Cal. App. 2d 389, 393 (1955) (allowing recovery of excess of advances over earned commissions where agreement specifically provided employee would have weekly advance that would be charged against his commissions).Koehl v. Verio, Inc., 142 Cal. App. 4th 1313, 1338 (2006); see also Prudential Ins. Co. v. Fromberg, 240 Cal. App. 2d 185, 188 (1966) (allowing employer to withhold "commissions otherwise due him to offset indebtedness . . . arising from the advances"the company had previously made).Dana Perfumes v. Mullica, 268 F.2d 936 (9th Cir. 1959). Div. of Lab. Stds. Enforcement, Enforcement Policies and Interpretations Manual (June 2002 Rev.), § 34.8; DLSE Opinion Letter 1993.03.08.Ellis v. McKinnon Broadcasting Co., 18 Cal. App. 4th 1796 (1993); DLSE Opinion Letter 2002.06.13-2; Watson v. Wood Dimension, 209 Cal. App. 3d 1359 (1989)( Term of employment agreement providing that advertising salesman forfeited his right to a commission if he terminated his employment before his employer received payment for advertising was unconscionable and unenforceable: "[T]he issue is simply a matter of when KUSI received payment for the advertising, which appears to turn on KUSI's billing cycle and the advertiser[']s payment practices instead of on anything [the salesman] did or did not do."); Willson v. Turner Resilient Floors, Inc., 89 Cal. App. 2d 589, 598 (1949)("plaintiff's leaving the defendant's employ either voluntarily or by discharge would not terminate his right to commissions, as the contracts were completed, on sales made by him."). Div. of Lab. Stds. Enforcement, Enforcement Policies and Interpretations Manual (June 2002 Rev.), § 34.6, citingWillison v. Turner Resilient Floors, 89 Cal.App.2d 589 (1949); Wise v. Reeve Electronics, Inc., 183 Cal.App.2d 4 (1960) (where the employee was the procuring cause of a sale, he is entitled to the commission "irrespective of the fact that the principal himself, or through others, may have intervened.").McCollum v. Xcare.net, Inc., 212 F. Supp. 2d 1142, 1152 (N.D. Cal. 2002).American Software, Inc. v. Ali, 46 Cal.App.4th 1386, 1391 (1996) (Provision of plaintiff's employment contract that terminates her right to receive commissions on payments received on her accounts 30 days after severance of her employment held not unconscionable); see also DLSE Opinion Letter 2003.04.30 (American Software based on "unique facts" where "the salespeople had . . . on-going duties to service the accounts upon which the commissions were based"); see also Lucian v. All States Trucking Co., 116 Cal. App. 3d 972, 975 (1981) (employees who voluntarily left employment before end of accounting period not entitled to pro rata share of profits under bonus incentive plan requiring employee to work the entire accounting period before benefits vested). Cal. Lab. Code § 202; see also Div. of Lab. Stds. Enforcement, Enforcement Policies and Interpretations Manual (June 2002 Rev.), § 5.2.5.Nordstrom Com. Cases, 186 Cal. App. 4th 576 (2010).
Sign up for our newsletter to get product updates, exclusive client interviews, and more.