In last week’s episode we talked about the – somewhat complicated – world of hiring a commission based employee. What does and doesn’t qualify as a commission.
Base pay plus commission programs vs. commission only programs.
And some of the roadblocks you have to look out for when creating a commissioned position.
Well, this week, we’re going to cover your commission agreement. And the first thing you need to know is that in California you have to have a written commission agreement.
Now, this is one of those laws that actually doubles as a really good idea. Because it’s important that the company and the employee are on the same page around how these commissions are going to be paid. It can save a lot of headaches in the future.
So, as I mentioned, the agreement needs to be a written agreement. And that means, it’s not just a policy in your handbook – it’s actually a contract, between you and the employee. And you know my motto – all contracts have to be drafted by counsel. So give your labor attorney a call – I’m sure they have a template, and can whip one up for you in no time.
Your employee has to receive a copy of the agreement, and should sign showing acknowledgement. The agreement should also spell out the time period it covers – is it a year, or 3 years, or 6 months? Here’s a pro tip – even when your agreement has an expiration date, if it isn’t replaced by a new written agreement, the terms of the original agreement remain in place. So, if you’re set on revising your commission plan every year, be prepared to issue new commission agreements every year.
Oh, and keep in mind, anything earned under the original agreement has to be paid out under the original rules.
The agreement should define what qualifies for commission payments and how commissions are earned. This is really important because once the commission is earned, it’s a wage (we’ll talk more about this when we discuss commissions for terminated employees later in this episode).
“…earned commissions are wages, so they have to be treated like other California wages. They have to be paid in full at termination. If you don’t have what you need to calculate the commission, you have to calculate it at the soonest possible date and pay it out to the employee immediately.”
Some of the typical terms that allow a commission to be earned include when the customer executes the sales agreement – meaning, once they sign, the commission is then earned. Another, much more popular term is when the payment is received from the customer. Obviously companies prefer this term because they won’t find themselves in a position to be required to pay out a commission before they’ve received the funds from the customer.
Now obviously, if your sales involve multi year agreements or other unusual variables, your agreement should spell out how you will deal with that as well.
It should also specify how commissions are calculated and when they will be paid.
If you’re going to allow draws, make sure to outline in the agreement what the maximum draw can be, the deadline for repayment or reconciliation of the draw, and be specific that draws are not considered earned wages. This can be really important if you have to claw back some or all of a draw at some point.
Your agreement should also outline when and if there may be deductions from the commission. For instance, if the sale is discounted, or the item is returned. But keep in mind, you can’t do deductions for things unrelated to the sale – so you can’t deduct for things like general business overhead costs.
And don’t forget to address how splits with other salespeople, and overrides will be handled. And in case of a conflict, how & who will make the final decision.
And now, let’s talk about everyone’s favorite question – what happens when a commissioned salesperson leaves the company.
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Well first off, earned commissions are wages, so they have to be treated like other California wages. They have to be paid in full at termination. If you don’t have what you need to calculate the commission, you have to calculate it at the soonest possible date and pay it out to the employee immediately. That means you can’t just say – well, we only calculate commissions monthly, and we just did it, so you have to wait until we do that again next month. Not if you have the info you need to calculate it now.
And yes, commissions are subject to waiting time penalties…so be sure to pay them as soon as you possibly can.
The big question is – do I have to pay commissions to termed employees. Well, if the terms for earning a commission have not yet been met (for instance, the customer’s hasn’t paid by the time the employee terminates), then the commission has to be paid as soon as that term is met (meaning, when the customer pays, you have to pay out the commission – yes, even if it’s a multi year contract, and payment happens months or years after the employee has terminated) that’s why you have to carefully consider what the terms for earning a commission will be.
So far, CA courts are split on so called ‘forfeiture provisions’ – where a condition of earning a commission is that the person has to be currently employed in order to receive commission payment. So proceed at your own risk there – no, actually just consult with counsel – they’ll set you on the right path. But I will say that the employment attorneys I’ve worked with strongly suggest not taking that chance.
And finally, make sure you have a clause that says the agreement can only be revised in writing, signed by both parties. You don’t want some random statement by a manager to provide a basis for an employee to come back at you for a huge commission payment that you didn’t intend. “But Lucy said my commissions were increasing to 50%”. Nope – clarity is good.
Again, make sure the agreement is signed by both parties, reviewed frequently, and kept up to date. Those details can make a huge difference to your bottom line.