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.

By: Emily Schroeder 

In a recent blog post, we discussed how recent California judicial court decisions may erode the once-solid foundation of traditional incentive pay systems. Specifically, Armenta v. Osmose and Bluford v. Safeway held that while a piece rate compensated employees for their “productive time”—time spent actually working on piece-rate tasks—the piece rate did not compensate them for their “non-productive time”—time worked doing anything else.

The California Supreme Court has added to this line of cases in Peabody v. Time Warner Cable, Inc., where the timing of commission payments came under attack. In Peabody, the Supreme Court held that commission wages paid in one pay period cannot be attributed to earlier pay periods to satisfy minimum and overtime wage requirements.

The Pay Practice

The Plaintiff, Susan Peabody, worked for Time Warner as a commissioned sales person. She was paid biweekly, but only the final paycheck of the month contained her commissions. Her first paycheck, meanwhile, generally paid an hourly rate of less than 1.5 times the minimum wage for the hours worked during the pay period corresponding to that paycheck. 

Peabody filed a class action lawsuit against Time Warner, claiming that (1) she regularly worked overtime but did not receive overtime wages, and (2) she earned less than the minimum wage during those weeks in which she worked more than 48 hours.

Time Warner argued that (1) Peabody was exempt from overtime pay under the California Wage Order exemption for commissioned employees whose earnings exceed 1.5 times the California minimum wage and who earn more than one-half of their compensation in the form of commissions, and (2) Time Warner should be able to assign the commissions paid in one pay period to the earlier pay period to satisfy minimum and overtime wage requirements. 

The California Supreme Court Decision

When a federal district court court granted summary judgment for Time Warner, Peabody appealed to the Ninth Circuit. The Ninth Circuit, finding no controlling California precedent, asked the California Supreme Court to determine whether the timing of Peabody’s commission payments resulted in underpayment of minimum and overtime wages.

As an initial matter, the Supreme Court rejected Time Warner’s argument that it was permissible to use a monthly pay period for paying commissions; the Court reasoned that, except for employees subject to certain special exemptions, wages must be paid at least as often as semi-montly. Second, the Suprme Court held that commissions paid in one pay period could not be attributed to earlier pay periods to satisfy minimum and overtime wage requirements. The Supreme Court cited statutory construction principles that require it to construe statutes in a manner favorable to the employee.

Additionally, the Supreme Court cautioned employers against relying on federal law in establishing pay practices, as California law is often significantly more favorable to employees.

Workforce Solutions

In the wake of Peabody, employers with commissioned employees may want to review their current payroll practices to ensure that these employees are paid more than 1.5 times the California minimum wage during each pay period, to take advantage of the Wage Order overtime exemption for commissioned salespeople.  Peabody is also a further reminder that California employment law is peculiar: California employers should always be wary of the differences between federal and state law when establishing pay policies.

Edited by Julie Yap

As many employers know, California’s new written commission agreement law (Labor Code Section 2751) became effective on January 1, 2013.  This new law requires employers that pay California employees “commissions” to do the following:

1.    have a written contract with the employee regarding commissions that is signed by the employer;

2.    include in the contract the method for calculating and paying the commissions; and

3.    require the employee to sign a “receipt” retained by the employer. 

Unfortunately, while this law appears straightforward, it contains three major pitfalls for the unwary employer.  

Pitfall #1:  I only give my employees “bonuses” and “incentive compensation” as awards for making sales, not “commissions.”  The law clearly does not apply to me, right?!  Wrong.  Section 2751 may apply because it does not turn on the employer’s choice of name for the incentive compensation.  Section 2751 defines “commission” as “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionally upon the amount or value thereof.”  Thus, compensation constitutes a “commission” where:  

  • The employee is involved principally in the selling of a product or service, not making the product or rendering the service; and
  • The amount of compensation is a percentage or other ratio of the value of the property or service sold.

Even if a payment is called a “bonus” (or some other term), if it is paid as the result of the employee’s sale, and is based proportionally on the amount or value of the sale, it is very likely going to be considered a “commission” for purposes of Section 2751. 

     Any Exceptions?  Yes.  Not all sales-based compensation is automatically a “commission.” Section 2751 clarifies that it does not apply to three types of sales-related compensation: 

  • Short-term productivity bonuses, such as those that are paid to retail clerks;
  • Temporary, variable incentive payments that increase, but do not decrease, payment under the written contract;
  • Bonus and profit-sharing plans, unless there has been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed. 

Pitfall #2:  I don’t need to worry about this law because all of my sales employees are exempt, right?!  No.  Beware — Section 2751 applies to non-exempt and exempt employees! 

Pitfall #3:  I distributed my written commission agreements last year, and obtained employee signatures.  I have complied with Section 2751 and need not worry anymore, right?!  Alas, initial compliance with Section 2751 is not enough.  If the terms of your commission plans change (as often happens at least annually for many sales employees), you need to make sure you distribute a signed copy of the new plan to employees and obtain a new signed receipt.  This is particularly important because the law states:  “in the case of a contract that expires and where the parties nevertheless continue to work under the terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.”  Distributing new agreements when new commission plans are issued will help to protect you from claims that the terms of expired plans continue to apply.

Workplace Solutions: Employers should look closely at any forms of compensation paid to employees that might actually constitute “commissions” under Section 2751.  If an employer determines that a payment does constitute a “commission,” the employer should ensure that an agreement is in place that comports with Section 2751’s requirements.  Employers should also remember to ensure ongoing compliance with Section 2751 by updating and re-issuing written commission agreements as required by Section 2751 when commission plans change.