Seyfarth Synopsis: There are many different ways to pay employees in California. What is the scoop behind paying commissions? What are commission agreements and how have courts deciphered their coded mysteries? Read on for the most current intelligence from the SIA (Seyfarth Intelligence Agency).

Rogue Nation: The Rough Terrain Surrounding Commissions

What are commissions? Labor Code Section 204.1 defines a commission as a wage earned from either a sale of a product or a service when the wage depends proportionately on the amount or value of the goods or services sold. Deciphering whether a pay plan is truly commission-based can be a hard code to crack.

While sometimes confused with bonuses or piece-rate pay, commissions are neither. As stated above, they are wages earned by selling a product or a service, rather than by performing a particular task or service. The Labor Code protects commission pay just as it protects other types of wages.

Commissions are not profit-sharing plans, unless the employer has offered to pay a fixed percentage of company sales or profits as pay for work performed.

Paying commissions at termination. Labor Code Section 201(a) provides that earned commissions—like wages generally—are due as soon as employment ends. A DLSE Opinion Letter, however, states that a commission may not actually be earned until the employer has all the information needed to calculate the commission. Payment at separation is subject to this same rule—meaning that calculating wages owed and when they are due to a terminated commissioned employee can be complicated.

The Commission Ultimatum: You Need a Commission Agreement

Under Labor Code Section 2751, employers must provide most commissioned employees with a written agreement detailing how their commissions will be calculated and paid. This duty applies even if only some of the employee’s wages are in the form of commissions. Employers must give each such employee a signed copy of the commission agreement and obtain from the employee a signed receipt.

The conditions determining when a commission is “earned” must be defined in the commission agreement. The employer has a range of options in describing those conditions, so long as they are clear. For example, a commission can be earned when a customer executes a sale agreement, or not until the customer actually completes payment for the item or service. See Koehl v. Verio, Inc. (Cal. Ct. App. 2016) (commissions are earned when the employee has perfected the right to payment: when all the contractual conditions for requiring payment have been met).

Commission agreements can also give an employee advances on commissions, to provide the employee some cash flow before a commission is earned. These advances can act as loans, which the employee must re-pay if not earned, depending on the specific agreement in place.

Bridge of Lawsuits

Unfortunately, the open and customizable nature of commission agreements has led to litigation and trouble for employers down the road.

As commission agreements are contracts, much of the litigation surrounding their enforcement and interpretation has depended on how they are drafted. California courts will not enforce unlawful or unconscionable terms and will construe any ambiguities against the drafter of the commission agreement—usually the employer. See Aguilar v. Zep Inc. (N.D. Cal. 2014) (finding it impermissible to deduct from commissions such items as credit card fees and costs of samples).

Conflicts can also arise if employers misclassify as exempt an employee who earns some wages in the form of commission. Under California’s “commissioned sales exemption,” employees covered by Wage Order 4 or Wage Order 7 qualify as commissioned employees exempt from overtime-pay requirements only if: they earn at least 1.5 times the minimum wage and earn more than one-half of their income from commissions. This exemption applies only when conditions are met during a set pay period, which can mean that a regularly paid employee may be exempt during one pay period and not exempt during another pay period, when the employee has earned less commission. See Peabody v. Time Warner Cable Inc. (Cal. 2014) (an employer may not attribute commission wages paid in one pay period to other pay periods in order to show the minimum earnings needed to establish the commissioned employee exemption). Note also that the federal FLSA limits its own exemption for commissioned employees to those working for retail or service establishments. See 29 C.F.R Section 779.412.

Workplace Solutions: Searching for a “Safe House”?

Thinking of paying your “agents” by commission? Wondering if your commission agreements are a potentially deadly affair? Your friendly SIA Agent here at Seyfarth is happy to provide back-up.