Commission Based Pay Law

Brad Nakase, Attorney

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Commission based positions can be very lucrative but the wages are usually all dependent on the employee and how many sales he or she completes. California has certain laws that must be followed by employers to ensure employees are paid correctly and on-time.

What is commission?

Most people understand the premise of commissions but California lays out a specific definition. Commissions are considered wages paid for services rendered in sales of property or services.[1] The employee must be involved in sales to receive commissions.[2] However, it is important to recognize that bonuses are not the same as commissions because bonuses are given usually at the end of the year dependent on performance.

Commission usually arise more often and are dependent on the number of units or services sold. The amount received per commission is dependent on what the employer and employee agree when creating the relationship. However, it is usually a fixed percentage of profits or sales.[3]

Wages and commission

Wages is defined as payment in exchange for labor.[4] Labor is defined to include, “labor, work, or service whether rendered or performed under contract … or other agreement if the labor to be paid for is performed personally by the person demanding payment.”[5] Basically, labor includes any work performed for the benefit of an employer. Commission are deemed wages under California law.[6]

What must be included in the employment agreement to receive commissions?

In order to receive commissions, the employee must be in the sale of goods or services, as stated above. The terms under which commissions are earned are established by an agreement between the employer and the employee. Further, there must be a written agreement between the employer and employee including the specificities of the commission including, the way the commission is computed and how the employee will be paid.[7]

What happens to my commission if I quit or am fired?

Usually an employee is entitled to his or her commission regardless of if he or she quits or is terminated. However, the commission is for the items sold before leaving, not for anything after. There are times when the agreement between the employer and employee alters this general rule.[8] This occurs when there is a forfeiture clause in the contract and the employer can take away commission if the employee does not work through the entire contract date.[9]

There is a split of court decision on this issue, meaning courts do not agree whether this clause should be permitted or not due to it being unfair to the employee.[10] Whether this is a specific issue you will deal with depends on where you bring your case and in what court. Hopefully, in the future, employees will still receive commission even if he or she leaves or is terminated given he or she has already completed the sale.

Will I lose commission if my sale is returned?

Another issue that arises with many commission-based employees is what happens to this or her commission if the item or service is returned/canceled. Under California case law, it has been found in these instances, an employer can ask for the commission back or deduct it from further commissions.[11] This may seem unfair to the employee, however, the employer must ensure its product or service is actually being used and the employee is not just selling it to his or her family to gain the commission.

Difference between non-exempt and exempt employees

A commissioned employee is usually entitled to minimum wage unless he or she is deemed to be an exempt employee.[12]

In California, it is usually agreed employees have the right to

  1. overtime when working over 40 hours[13];
  2. right to be paid minimum wage (currently not less than $10)[14]; and
  3. right to certain breaks including lunch/dinner.[15]

However, this usually applies to non-exempt employees. There are certain times when an employee is not entitled to these benefits and will be labeled as exempt employees.[16]

In order to be exempt, the employee must meet certain requirements.[17] These include:

  • Making at least twice California’s minimum wage
  • Duty to use his or her own judgment in the workforce
  • Employee works in administrative or executive decision making[18]

Minimum wage requirements for employees

In order for an employee to be exempt from minimum wage, he or she must be making twice the California’s minimum wage. For example, if your employer has 30 employees and the year is 2019, you must be making at least $24/hour to be qualified as an exempt employee. If you are making less, you will be considered a non-exempt employee and can receive minimum wage.

What is a rest period?

If an employee is solely compensated through commissions, the employer must pay the employee for rest periods taken. A rest period, by definition, is an uninterrupted period of time (usually ten minutes) where an employee does not work but still is paid.[23] An employer also must provide an area where the rest period can be taken that is not the bathrooms.[24] An employee can voluntarily forfeit this rest period and the employer will not be held in violation of the California Code.

When is my commission due?

Most payments are paid bi-monthly, or twice a month.[25] Specifically, employers usually pay their employees the 1st and 15th of the month.[26] However, some employees, specifically those salaried and covered under the Fair Labors Standards Act, may be paid once per month.[27] Overtime, time worked over expected shifts, must be paid no later than the next payday in order to be determined as on time.[28] These rules also include commissions and the employer must follow the above procedures.

What to do if your employer has not followed the above regulations?

If you feel your employer has violated one of the above rules or regulations, it is best to speak with your employer or a division internally. This hopefully resolves the issue quickly and effectively. However, if this is not an option or fails to succeed, the employee can file a wage claim with the State of California’s Division of Labor Standards Enforcement. If this is not what you want to do, reaching out to an attorney to ensure you have a valid case would be the next step.

An attorney can lead you in the right direction and file a claim for you. There are many options on how to file a claim, however, it is important to do what you feel is best for your particular situation.

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Legal Reference

US Dept. of Labor – Commissions

[1] Labor Code § 204.1

[2] Labor Code, § 204.1

[3] Labor Code, § 2751, subd. (c)(3)

[4] Cal Labor Code § 200

[5] Labor Code § 200

[6] Labor Code, § 200, subd. (a)

[7] Labor Code, § 2751, subd. (a)

[8] Nein v. HostPro, Inc. (2009) 174 Cal.App.4th 833, 853

[9] Nein v. HostPro, Inc. (2009) 174 Cal.App.4th 833, 853

[10] Nein v. HostPro, Inc. (2009) 174 Cal.App.4th 833, 853

[11] Davis v. Farmers Ins. Exchange (2016) 245 Cal.App.4th 1302

[12] Cal. Code Regs., tit. 8 § 11040(4)(B)

[13] Labor Code § 510(a)

[14] Labor Code § 1182.12(a)

[15] Labor Code § 512(a)

[16] Labor Code § 515(a)

[17] Labor Code § 515

[18] Labor Code § 515(a)

[19] Cal Labor Code § 1182.12(a)

[20] Cal Labor Code § 1182.12(a)

[21] Cal Labor Code § 1182.12(b)(1)(A); Cal Labor Code § 1182.12(b)(1)(B); Cal Labor Code § 1182.12(b)(1)(C)

[22] Cal Labor Code § 1182.12(b)(2)(A); Cal Labor Code § 1182.12(b)(2)(B); Cal Labor Code § 1182.12(b)(2)(C)

[23] Cal. Code of Regs., tit. 8 § 11010

[24] Labor Code, § 1031

[25] Cal Labor Code § 204(a)

[26] Cal Labor Code § 204(a)

[27] Title 29 § 13(a)(1)

[28] Cal Labor Code § 204(b)