When To Contact a Lawyer about a Sales Commission Dispute in California
Commission earned from selling goods or services is a significant form of compensation for many workers in California.
Employees who earn a living this way have certain legal protections to ensure they receive the compensation they’re owed by their employers.
This page will break down what California law says about sales commission and address some common questions that employees have about their rights to compensation.
We will also describe how an employment lawyer can help you handle some of the employer disputes that tend to arise around commission payments.
What Counts As A “Commission” Under California Law?
In California, commission is defined as the pay that an employee receives for selling a product or service on the behalf of an employer.
What triggers the payment is the sale itself — not the production of the item or the performance of the service, the labor of which is compensated to different people in different ways.
Some employees are “commission only,” meaning that the entirety of their pay depends on the sales that they make.
Other salespeople could be compensated in other ways in addition to their earned commissions, be it minimum wage pay or a salary.
Sales commissions can be calculated and paid based either on:
- A percentage of the value of the good/service sold, or
- The total number of the goods/services sold.
Legally, sales commissions are considered a form of earned wages under the California Labor Code. This means it’s illegal for your boss to withhold or delay payment, which would be a form of wage theft.
Be aware of some similar forms of compensation that DON’T meet the definition of earned commission under California Labor Code and aren’t protected in the same way:
- Short-term productivity bonuses such as 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.
Commission payments should show up on employee’s paychecks in a regular, timely manner.
Under California Labor Code, “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.
So, if an employee’s commissions were earned between the 1st and 15th days of the month, then they should be paid between 16th and 26th day of the same month.
Similarly, sales made from the 16th through the last day of the month should 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 car dealers, though. Vehicle dealers licensed by the California DMV are allowed to make commission payments just once each calendar month, on a day designated by the dealership in advance.
What Is A “Sales Commission Agreement”?
California law also requires employers who pay based on commission to document the terms of the arrangement in writing, either in an employee contract or a formal “sales commission agreement.”
This document should detail:
- How sales commissions will be calculated
- The way the employee will be paid
- When the employee is entitled to payment
- Any legal deductions that may be made from payments
Your employer is required to give you a copy of this agreement, and they may ask you to sign it to confirm you understand when and how you’ll be paid.
If the time period designated for this agreement expires, but you continue to work for your employer, the terms of the agreement legally continue in full force until a new agreement is signed or until your employment relationship ends.
In some cases, an employer might pay an advance against earned commissions, known as a “draw.” If so, your commission agreement should clearly state whether you’re required to pay back some amount of that advance if you don’t ultimately earn it as a commission.
Because the law requires that commission arrangements must be in writing, if the agreement doesn’t include anything about repayment, amounts paid in advance will be treated by courts as general wages in the event of a dispute.
When Can My Employer Legally Make Deductions From Sales Commission Payments?
In general, 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, e.g., payroll tax deductions.
According to California law, your employer can’t make deductions from your pay unless they can show that they suffered a financial loss caused by:
- A dishonest or willful act of the employee, or
- An employee’s negligence.
Employers may, however, deduct certain costs related to the sale that led to the commission: for example, the cost of incentives like free shipping or free products offered to close a deal.
Additionally, in retail sales, your employer may deduct the amount of a past commission from a future payment, if a customer ends up returning a product they’d purchased.
To do this, though, they must have specific documentation confirming that a specific employee made the original sale, as well as proof of return.
Any of these potential situations for altering an employee’s take-home commission must be clearly described in writing in the formal commission agreement. If they’re not, your employer isn’t legally entitled to deduct from your earned wages.
Are Salespeople Covered By California’s Minimum Wage And Overtime Laws?
Most sales employees in California are considered non-exempt workers, meaning they’re entitled to receive the benefits granted by the Fair Labor Standards Act, like state minimum wage, overtime pay, and meal/rest breaks.
This also means that even if a salesperson doesn’t make any sales in a given two-week pay period, they should still expect to receive a paycheck with compensation for their hours of work.
The only times that these FLSA benefits don’t apply are in the case of employees who are considered legally “exempt.”
In California, certain types of commissioned employees fall into a special category of employee exemptions directed at “outside salespersons.”
An outside salesperson is someone who spends more than half their work time away from their employer’s place of business “selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities.”
One example would be an insurance salesperson who travels door-to-door to clients’ homes or offices.
To qualify for this exception, it’s not enough for a salesperson to be simply working outside of their employer’s main office, or even in their own home.
An employee would still be considered an “inside salesperson” (and entitled to FLSA benefits) if they habitually conduct over half their sales work on the phone from a home or remote office.
For the outside salesperson exemption to apply, the employee must be specifically pursuing sales-related tasks outside of an office setting, including soliciting new business, meeting with customers, or conducting promotional work.
Importantly, even “inside salespeople” can also be exempted from overtime pay (but still required to receive meal and rest breaks), under certain conditions. This happens when:
- More than half of their pay comes from commissions, and
- Their earnings exceed one and one-half times the minimum wage.
The rules for measuring these earnings can be complicated, though. For one, earnings have to be measured during a “representative period,” usually a quarterly cycle.
This can mean that depending on how much they sell in a certain year, a salesperson can be entitled to overtime in January, but not in April.
Because there’s a lot of variation in this rule, it’s a good idea to consult with a legal professional if you’re an inside salesperson and think you’re entitled to unpaid overtime.
If your employer has you classified as an outside salesperson but you don’t think your duties fit this definition, you may also wish to speak with an employment attorney.
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 My Employer Make Changes To The Sales Commission Structure Or Agreement?
Your employer may ask you to enter into a new or revised agreement. They could even make your continued employment contingent upon agreement to the new terms.
But your employer can’t do this to 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.
In some cases, employees have found that their employer will try to change the terms of their commission agreement after a sale has been made — resulting in a lower commission for the salesperson. Is it legal to lower the commission after the employee has done the work? The answer isn’t always clear.
Generally, the law grants employers the power to unilaterally make changes to commission agreements. But courts can still intervene if companies exercise this power unfairly.
Like in the case of significant changes made without giving employees notice, changes that appear an effort to avoid paying promised commissions, or retroactive changes, which some California courts have specifically refused to enforce.
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 you were made aware in advance of the potential for changes made to the agreement by your employer when you signed it, there still could be circumstances when it would be considered improper for an employer to alter the agreement.
In these cases, you should seek the advice of a lawyer who can review the agreement and help you understand your legal options.
What Happens 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 are fired may depend on the specific terms of your sales commission agreement.
The most influential factor here is whether your pending commission can be considered “earned” or not.
Legally, a commission is “earned” when an employee has met the conditions laid out in their commission agreement designating that the sale is finalized, and it’s time for the salesperson to be paid.
This can look different for different employees, depending on your industry and your employer. For instance, an agreement could say that a commission becomes “earned” when:
- A customer signs an agreement to purchase a good/service,
- A customer pays money for a good/service,
- A customer receives a good/service, or
- Other conditions set out by an employer.
Depending on the written agreement, the conditions under which a commission becomes “earned” can be relatively ambiguous.
This is often the case if the process for completing a sale takes place over an extended period of time, such as a real estate transaction.
If a salesperson still may have some responsibilities to their client at the time when their employment ends, there could be some dispute over what, if any, part of the payment they can recover.
Generally, it can be difficult for an employee who voluntarily leaves their position to recover the full portion of the commission they expected if certain steps in the process of completing the sale are still left unfinished.
Employees who’ve been unexpectedly terminated, however, may be able to recover a prorated portion of their commission, provided that they can show they fulfilled their responsibilities in process prior to termination.
The results in these situations can vary widely depending on the circumstances and details of the agreement.
Consulting with an employment attorney who can assess your situation is essential for employees who think they’re owed outstanding commissions from former employers.
What If I Never Received A Written Commission Agreement?
Failing to provide a written agreement to employees paid by commission is a violation of California’s labor code.
Companies who willfully break state labor law can be required to pay legal penalties for their wrongdoing — in addition to potential recovery for unpaid wages and/or attorney’s fees you incur in the process.
If you are concerned that your employer has not paid the sales commissions you’re entitled to, or that they’ve improperly deducted amounts from your commissions, you should reach out to an employment attorney.
An experienced lawyer who’s familiar with the specifics of California’s unique sales commission laws can evaluate your situation, explain your options for legal restitution, and advocate for you in court.
Get in Contact With a California Sales Commission Lawyer Today
Ottinger Employment Lawyers have been fighting on behalf of employees in California for over 20 years.
Contact us today to speak to an experienced employment attorney about your case and how we can help you too.