Sales Commissions are a form of wages paid to sales employees. Sales Commissions are calculated and paid based on a proportion of the amount or value of the goods or services sold.
California law requires that sales commission arrangements must be spelled out in a written agreement signed by the sales employee. Sales commissions must also be paid timely.
If you are owed sales commissions, our employment lawyers may be able to help you get paid. We have offices in Los Angeles and San Francisco. For details about our Los Angeles office, click here.
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What Does Timely Mean?
Under California Labor Code §204, timely payment means sales commissions earned must be paid at least twice per calendar month on the days designated in advance by the employer as paydays.
If sales commissions were earned between the 1st and 15th days of the month, then payment must be made to the sales employee between the 16th and 26th day of the same month.
For sales made from the 16th through the last day of the month, payment must be made between the 1st and 10th day of the following month.
California law makes an exception to the twice-a-month payment rule for vehicle dealers. DMV-licensed vehicle dealers may pay sales commissions just once each calendar month on a day designated by the dealership in advance.
Sales Commission Agreements
Aside from the general requirement for timely payment under the California Labor Code, the particular terms of any commissioned sales arrangement should be outlined in a Sales Commission or Employment Agreement.
However, there are limits on what sorts of terms in a sales commission agreement will be enforced by courts. Generally speaking, any terms that are against California law or public policy, or that are substantively unconscionable (so unfair as to shock the conscience of a reasonable person), will not be enforced and will be considered void.
Is a Sales Commission Agreement Required?
Yes, California Labor Code §2751 requires that compensation based on a commission structure must be set forth in a written agreement. In addition, the employer must give a copy of the agreement to the employee and may require the employee to sign a receipt for it.
What Does a Sales Commission Agreement Need to Include?
Every Sales Commission Agreement must include a clear description of the method by which commissions will be computed and paid. Furthermore, sales commission agreements must contain clear descriptions of any amounts the employer plans to deduct from earned commissions.
You should be able to understand from the agreement exactly what you will be paid for your work and when your right to payment will accrue.
If an agreement expires, but the employee continues to work for the employer, the terms of the expired contract are deemed to continue in full force until a new agreement is signed or until the employment relationship is terminated.
If the employer pays an advance or “draw” against earned commissions, the agreement must clearly state that such payments must be repaid by the employee if they are not ultimately earned as a commission.
Because the law requires that commission arrangements must be in writing, if the agreement is silent about repayment, amounts paid in advance will be treated by courts as general wages in the event of a dispute.
What can the Employer Deduct from Commissions?
Employers are prohibited from deducting their own costs of doing business from sales commissions that have been earned unless they can establish that there was a loss caused by a dishonest or willful act of the employee, or by the culpable negligence of the employee. Quillian v. Lion Oil (1979) 96 Ca.App.3d 156.
Employers may, however, deduct certain costs related to the sale that gave rise to the commission – for example, free shipping or free products offered to induce the sale.
In a retail environment, employers may deduct from future commissions amounts for past commissions paid on merchandise that has subsequently been returned by a customer.
However, the employer may only do so if they have tracked and can show that the item returned was originally sold by the same employee. Hudgins v. Neiman Marcus (1995) 34 Cal.App.4th 1109.
Anything the employer plans to deduct must be clearly described in the written agreement. If it is not mentioned in the agreement, the employer is not entitled to deduct it. Davis v. Farmers Ins. Exchange (2016) 245 Cal.App.4th 1302, 1333.
Outside Sales
California law distinguishes between “outside” sales and “inside” sales. Outside salespersons are exempt under California Labor Code §1171 from minimum wage and overtime requirements.
An outside salesperson is defined as someone who spends more than half their work time away from the employer’s place of business “selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities.”
If your employer has you classified as “outside sales” but you don’t think your duties fit this definition, you may wish to speak with one of our attorneys.
Misclassification of an employee as an outside salesperson is one way in which some employers may try to evade their obligations to pay minimum wage and overtime.
Can the Employer Make Changes to the Sales Commission Structure or Agreement?
An employer may ask a sales employee to enter into a new or revised agreement and may make the salesperson’s continued employment contingent upon the employee’s agreement to the new terms.
However, employers may not, in this way, avoid paying commissions already earned under a previous agreement. Once a commission has been earned based on the old agreement’s terms, it must be paid.
What if There is no Agreement?
If you are paid an advance or “draw” against commissions but there is no written agreement covering your employment or expressly stating that such payments are considered loans against commissions yet to be earned, then courts will consider such payments as wages earned for the period.
Employers are not allowed to divert or deduct any portion of their employees’ wages unless they are otherwise required or empowered by state or federal law to do so.
If you perform “commissioned” sales work without a written agreement but do not make any actual sales or earn any commissions, you are still entitled to some compensation for your work since all California employers must pay minimum wage and overtime.
(The only exception to this is for properly classified outside salespersons.) The failure to provide a written agreement for employees paid by commission is a violation of California’s labor code.
If an employer’s failure to comply with California labor laws is found to be willful, they could be required to pay additional penalties, including attorney’s fees in some cases.
What if I am Fired or Leave While Sales Commissions are Pending?
Whether or not you are entitled to be paid pending sales commissions when you quit, or if you get fired, may depend on the specific terms of your sales commission agreement.
If there is no agreement, however, or if the agreement does not describe and set terms for this kind of circumstance, then courts would be more likely to find that you must be paid for any commissions earned or pending at the time you left.
It is well established that California public policy favors the protection of employees’ wages. California employers may not unjustly enrich themselves at the expense of their employees, and they may not transfer the financial burden of their business expenses and risks to their employees.
What if I Close a Deal but the Company Changes the Terms of the Deal Such That it Results in a Lower Commission for Me?
Again, this likely depends on the specific terms of your written agreement and the specific ways in which the company has altered the transaction.
If it has been done in a way that was not clearly contemplated and agreed on by you in writing, in advance, and it was something beyond your control, you may still be entitled to the full commission.
Even if the changes made to the deal were of a type specifically contemplated, with clear provisos in your agreement allowing the employer to reduce your commission in those cases, there could still be circumstances under which it would be considered improper for an employer to reduce your commission.
If you are concerned that your employer has not paid you sales commissions to which you are entitled, or that it has improperly deducted amounts from your commissions, our attorneys in Los Angeles and San Francisco may be able to help.
Schedule a consultation here.