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Does the state of California have specific rules regarding the payment of commissions as a form of compensation?

Yes. There are unique California rules for commission based pay. Prior to determining the rules regarding the use of commissions as a form of compensation in the state of California, it is important to understand how the state of California defines commissions.

In the case of Keyes Motors, Inc. v. DLSE (1988), the court defined commission wages as those that arise from the sale of a product, not the making of a product or the rendering of a service. The court further held that in order to be considered a commission, the compensation must be a percentage of the price of the product or service sold.

Written agreement requirement for commissions

Assembly Bill 2675 requires all employers doing business in California to draft written contracts for any agreements with employees that involve commissions as a method of payment for services effective Jan. 1, 2013. In addition, employers must provide a signed copy of the contract to every employee covered by the commission agreement and obtain a signed receipt for the contract from each employee. There are no penalties associated with a violation of the new statute, but presumably it could be a basis for suit under California’s Private Attorney General Act (PAGA) and Unfair Competition Law.

Draws Against Commissions

If an employee receives a draw against commissions to be earned at a future date, the “draw” must be equal to at least the minimum wage and overtime due the employee for each pay period (unless the employee is exempt, i.e., primarily engaged in outside sales). Although the draw may be reconciled against earned commissions at an agreed date or when the commission is earned, the draw is considered the basic wage and is due for each period the employee works.

Advances may only be recovered at termination if there is a specific written agreement to that effect and only to the extent that the advances exceed the minimum wage and overtime requirements. Reconciliation of draws against commissions are to be construed according to the contract of employment, but must be completed within a reasonable time depending upon the transactions involved.

Computation of Commissions

Commission computation is based upon the contract between the employer and the employee. The commission may be based on either gross sales figures or net sales figures. Certain criteria cannot be considered when reaching the “net” sales figures. If the element upon which the deduction from the gross sales is based is predicated upon a cost that is attributable to the employer’s cost of doing business, the element may not be used. 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 used in computing the payment of the commissions.

Common law of contracts also supports payment of commission. There are a number of contract cases based on common law as adopted in California that hold that if the employee is the procuring cause of the sale, he or she is entitled to the commissions. The phrase, “He who shakes the tree is the one entitled to gather the fruit” is used to describe the concept.

Timing of payment

Commissions are a form of wages in California. Under the Labor Code, wages must be paid within a specified time period after they are earned. As previously noted, employees who quit or are terminated typically must be paid their final wages on their last day of employment, or penalties may accrue. However, there is an exception to final payment of wages due upon the end of employment where a bonus or commission cannot be reasonably calculated at the end of the employment. In such a situation, an employer must pay the earned bonus or commission when it can be reasonably calculated.

Termination of Employment

A commission is “earned” when the employee has perfected the right to payment, that is, when all of the legal conditions have been met. Generally, if the contract for the commissions is clear and unambiguous and there are substantial duties that must be performed in order to complete the sale, the employee who voluntarily terminates without accomplishing those tasks is not entitled to recover his or her commission. Note that nonrecovery is limited to cases involving questions of when a commission has been earned by a terminated employee on a “sale” transaction that is not an instantaneous event (as in the context of retail sales) but, rather, is “completed” over a relatively long period of time during which the sales agent may be required to perform additional services for the customer.

When the termination is a result of the employee discharge, the employee has been prevented from completing the duties and may be able to recover all or a prorated share of the commissions. The use of common law doctrines such as “prevention” and “impossibility of performance” may be asserted by any employee as a basis for recovering commissions despite having failed to perform all of the conditions otherwise required of the job.

There are a multitude of commission plans and no exhaustive source for how to handle all situations or employment contracts or commission plans and agreements. It is best to have an employment attorney review your commission structure, policies and specific situations before determining what is payable to commission employees.


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