The other day, one of my clients was worrying about the cost of hiring a new team member. But then he said – I figured it all out – I really can make my new employee pay for themselves. I’ll just pay them commission only. That’s when I had to say – um, not so fast.
Don’t get me wrong – there are huge advantages to commissioned salespeople. For the employee, their earnings potential is over the moon – after all what’s the saying “they eat what they kill”. And for you, the employer, you can have a much smaller base salary at risk. But there are some things you need to keep in mind, if you decide to go the commission route.
First, let’s talk about what commissions are and aren’t. Commissions are a form of compensation based on % or sales or # of sales made. They aren’t discretionary and they aren’t bonuses. And in California, they’re considered earned wages.
Generally – commissions have to be paid at least two times per month; except for commissioned car salespeople who can be paid once a month
Under the state definition, since commissions are earned by the selling of a product or service, those people not involved in sales can’t earn commissions. So if they’re not selling but simply delivering the service, they can’t earn commissions. However, they can be bonused based on a % of goods or service sold – but they can’t earn commissions.
Now, the definition of what is and isn’t a commission is important because there are some very strict laws around how to deal with commissions.
“…since commissions are earned by the selling of a product or service, those people not involved in sales can’t earn commissions.”
There are various types of commissioned employees – basically two types of commission jobs. There are the jobs were the employee is paid a base salary, and then receives commission or incentive pay on top of their base pay. In this scenario, no matter if they sell or not, they will still get their base pay.
Now this type of commission program is the one we most often see with our clients. Mainly because it’s very difficult to find experienced talent to work solely on commission – not impossible, but very difficult.
Most people need to know that there is a base guaranteed for them – so if they have a slow month they won’t find themselves without any income at all.
There is also the question of how does the person get adequately paid while they are ‘ramping up’ in their role. Well, you may choose to allow a draw or advance against the commission piece for a period of time, until the salesperson gets in their flow. But again, keep in mind that commission draw or not, you have to be careful that they aren’t paid less than the minimum wage during any pay period.
And that can be more complicated than you might think. The state has a minimum wage for overtime eligible positions (that’s an hourly rate that is generally adjusted annually) and there is also a minimum wage for positions exempt from overtime. It’s twice the weekly minimum wage for a full time employee.
So for example- if the minimum wage is $15 per hour. The exempt minimum wage would be $15 times 40 hours, times 2 or $1,200. So, if they aren’t getting at least $1,200 a week, in addition to meeting the job duties test, then they will automatically be considered non exempt, or eligible for overtime. And let’s not gloss over the job duties test part of eligibility, both at the Federal and state levels. I’ve put a link to both the Federal and California rules around this, in the show notes. Yes – they’re slightly different….I know…
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And while you may think you’re out of the woods because with the commission they’ll get more than minimum wage – not so fast. You have to be sure, each pay period, that the base wage plus the draw adequately cover not only the minimum wage, but also any overtime they’re entitled to.
So yes – to figure out all the rules and cross rules and math, each pay period…well again – it’s VERY complicated. So of course, I’m going to advise you to check in with your labor counsel and HR consultant.
Now, another type of commissioned job is the commission only position. With this type of commission plan, the employee is paid commission only and doesn’t receive any type of base pay.
The main difficulty with this type of plan is that it very likely won’t meet the qualifications to be exempt from overtime laws – because one of the qualifications is the salary basis test (yep, we’re back to that). And commission only plans have been found not to meet this criteria (again, you’ll find more specific details in the show notes).
In fact Federal guidelines for exemption say that the employee has to receive “a predetermined amount constituting all or part of the employee’s compensation”. And a commission, even a draw against a commission, can’t be considered predetermined because it can go up and down.
And then, on the other hand – if the position is classified as non exempt, well then you’re back to minimum wage, meal and rest breaks, and overtime rules to contend with. So, all in all, it’s very challenging to properly manage a commission only program, and stay on this side of the law.
In next week’s episode well talk about commission agreements. Because, if you have commissioned employees, you have to have one – and it’s important that all the critical items are included.