Employees can be paid in a variety of different ways. While some are paid salary or hourly wages, others are paid by commission. Commissions arise from the sale of a product or service rather than the making of a product or the rendering of a service. In order to be a commission, the compensation must be a percentage of the price of the product or service sold.
The person receiving the commission must be “principally” involved in selling the goods or the services from which the commission arises. Commission plans which refer to a percentage of a business, such as the cost of the goods sold by the business, do not constitute a commission wage. Employers who earn commission wages have a right to be paid for their work and paid on time.
Requirements for a Commission Wage Agreement
California Labor Code 2751 contains the requirements necessary for entering a commission wage agreement between an employer and an employee. These requirements include:
- The employment contract should be in writing and include how commissions are calculated and paid.
- The employer will give a signed copy of the contract to the employee(s) receiving commission wages.
- Commissions are not considered short-term productivity bonuses, temporary incentive payments, or bonus and profit-sharing plans.
Essentially, this means that a commission agreement must be written and set forth specific terms about the commission arrangement, such as:
- How the employer’s commission is calculated
- When the employer must pay commission and how often
- The employer’s primary duty when it comes to selling
- The time when a commission becomes earned
Additionally, most sales employers are required to get paid at least minimum wages on top of their commission wages, unless they are “exempt” employees. Upon completion of a commission agreement, employees are required to sign a receipt as proof and must be given a copy of the agreement.
People often confuse commissions with bonuses or piece rate plans. A bonus is a payment in addition to a regular wage, and a bonus can be required by agreement or be discretionary. They are not predicated upon the price of a particular product or service, but are usually based on reaching minimum sales or making a minimum number of pieces.
Protections Against Employer Deductions
Under California law, employers generally cannot deduct from commissions already earned by employees. This means that the employer’s cost of doing business cannot be deducted from commissions or any other pay plan. With the assistance of an unpaid wages attorney, there are various legal avenues for protections against employer deductions to be addressed with.
For example, an employer could not legally deduct wages for damages to goods caused by a customer or returns of products that were credited to other employees. As with all other wages, California law prohibits deduction from commission for cash shortages, breakage, loss of equipment, and other business losses that may result from the employer’s negligence.
If there are deductions in commissions, they must be laid out in the written commission agreement. Common commission deductions included in employment agreements include those for:
- Selling products at a discount
- Products being returned or payment being refunded
- Damage caused by the worker’s deliberate, dishonest, or grossly negligent actions
There are certain instances where an employee may be able to reduce an employee’s commission rate, however, the employer must give notice to the employee and apply it prospectively toward future commissions, rather than retroactively toward commissions already earned.
Commissions for Terminated Employees
Generally, even terminated employees are still entitled to receive commission wages. In California, commissions are considered wages, and wages must be paid to employees on their last day on the job. This may be more complicated with commissions because some commission calculation takes time because it is calculated on the “final sale” of the product. In these cases, the employer has a reasonable time frame to pay the employee’s commission.
Additionally, California courts have a policy against forfeitures, and they don’t want people to give up what they rightfully earned. If some work remains to be completed to earn the commission, California law directs the court to give a pro rata share to the terminated employee. In other words, once the sale is secured, the employer cannot avoid payment by getting rid of the employee. To learn more about commissions for terminated employees, you may consult with a wage and hour attorney.
An employee might earn commissions on sales not yet complete, but this depends on how much work is left to be done to complete the sale. If the contract for the commissions is clear and unambiguous, and substantial work remains to be done in order to complete the sale, the employee who voluntarily quits without finishing the work might not be entitled to commissions.
Need Assistance Getting Paid for Commission Wages?
Salespeople do their jobs with the expectation that they will be rightfully paid. If an employer does not give you your entitled commission wages, they are in violation of the law and may be held liable for a labor code violation and breach of contract. At Shegerian & Associates, we are here to listen to your story and fight for your rights. Contact our unpaid wages lawyers for a free case evaluation and we will guide you through the successful resolution of your case.