What’s the Skinny on Commissions in California


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If you’re anything like me, when you hear the word commission, you just move along because you don’t have commissioned salespeople on your team.  Oh sure, sometimes if you want to incentivize the team to help with sales, you offer them a bonus based on the amount of the sale, for bringing in an account – but those are just bonuses, right.

Well, not according to California.  Any wages that come from the sale of a product (making the product or rendering service wouldn’t count), but if it comes from the sale, and is calculated as a percentage of the price (either gross or net) – then those are commission payments.

OK, so now you know you actually do have commission payments.  Now what do you do?  Well, first up you’ll have to provide written commission agreements for everyone that is subject to being paid commissions.  Effective January 1st, 2013, California required written commission agreements for everyone being paid commissions.

Now, yes – there aren’t any specific penalties associated with violating the statute, but it could be the basis for a lawsuit under other laws, like the Private Attorney General Act or PAGA; or the Unfair Competition Law.  So, it’s best if you don’t ignore the requirement.

So, what needs to go in this commission agreement – well there are a few decisions you’ll need to make first.

Will you allow draws.  If so, keep in mind that any draw has to be at least the same amount as minimum wage and overtime due to the employee.  So, if Sandy works 43 hours in a week, and you are giving her a draw against future commissions vs. paying her for the time worked – well, then the draw still needs to at least be the same amount as if you paid her for the time worked – meaning overtime and all.  You see, the concept is, you can’t use giving a draw as a reason to pay someone less than they would have otherwise received under the current wage rates.

The only time this wouldn’t apply would be if Sandy is classified as an outside sales person.  There are specific guidelines that have to be met for that classification – including that the person has to be primarily engaged in outside sales.  So selling away from the office, the majority of the time.  Oh, there are other stipulations – but just know that if Sally meets the outside sales classification, then her draw wouldn’t have to meet these minimums.

…Another thing about draws, you as a company, can’t get them back unless it is specifically outlined in the commission agreement.

Another thing about draws, you as a company, can’t get them back unless it is specifically outlined in the commission agreement.

Next up is how are commissions calculated.  Again, this will be based on the terms outlined in the commission agreement (see why this agreement is such a big deal – it basically guides everything).  Commissions can be based on gross or net sales – and by the way, when I say net, it doesn’t mean you have done deductions for things that are considered the cost of doing business.

Commissions can be subject to chargebacks for returns – but again, it has to be spelled out in the agreement.

Now on to when commissions are paid.  Well that’s simple right – it’s when they are earned.  But that phrase – earned – means different things to different people.  Particularly the lawmakers in Sacramento.  Under California Labor Code, commissions are a form of wages, and so they must be paid within a specific time period after they are earned.  Again, take not of the ‘after they are earned’ part of that sentence.

So, assuming the commission has been earned, then it has to be paid according to the regular California wage payment guidelines.  A minimum of twice a month, everything earned between the 1st and 15th of the month paid n later than the 26th of the same month.  And commissions earned from the 16th through the last day of the month, paid no  later than the 10th of the following month.

Now, let’s dig in on this earned statement a bit more.  The commission agreement should outline what needs to happen for a commission to be earned.  And remember, once Sandy has done everything outlined in the agreement to earn a commission, it is considered payable wages to her.  So for that reason, employers tend to be really careful about defining when a commission is earned.  They want to include things like, 90 days after the customer has purchased (to make sure there isn’t a return or something).  But the problem with this is that simply letting time go by isn’t a job function of the salesperson.  It isn’t an action they can be required to perform to complete or support the sale.

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Now, if part of Sandy’s duties to close the sale is to physically monitor delivery of the product, and correct any installation issues – then there is an argument for waiting until the product has been installed before the commission is earned.  But if once Sandy closes the sale, then it goes to someone else to facilitate delivery, servicing etc., well then Sandy’s part is done, and her commission is earned.

Now again – as I said at the top – I am not an attorney, so you definitely have to get counsel involved in any and all agreements.

What happens when Sandy leaves the company, do you still owe her commissions.  Probably.  Any commissions she has earned, are due and payable to her under the same guidelines that apply to any final wages paid.  But, if you can’t reasonably calculate all commissions due at the end of Sandy’s employment, then you should pay what you can calculate, and pay the rest as soon as you can reasonable calculate it.  I didn’t make that phrase up, it’s in the statute.

Another really important thing to keep in mind – if a deal Sandy brought in closes a year after she terminates, depending on the requirements to earn the commission, you may owe Sandy a check for the commission on that sale.  And yes, this is a common thing – we see it all the time

So, what if you don’t have a commission agreement.  Well, for one thing, draws will automatically be considered earned wages, so you may get into troubled waters if you try to use them as an offset to commissions.  And again, as I mentioned earlier, you may be running afoul of some thorny employment laws.  And finally, everything about the commissions will be determined to the maximum favor of the employee – because you haven’t agreed to anything different.

So, the final takeaways are:

1 – think carefully about the design of your commission program

2 – think carefully before you create a ‘commission only’ position in your company

3 – get a good employment attorney to draft a commission agreement for you, and periodically review it.

Aside from the fact that you’ll need their big brain on the project, remember that all commission agreements remain force until one is formally replaced with another.  So if you’re operating on a commission agreement from 4 years ago, it may not quite meet the need of your company today.

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