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Compensation is generally considered a commission if it is paid to an employee for services rendered in the sale of your property or services and is based proportionally on the amount or value of those sales.1 The employee receiving the commission must be involved principally in selling the goods or services on which the commission is measured.
Commission wage compensation plans can present issues for employers. Each commission plan is unique and must be interpreted and applied to establish the parties' rights and liabilities.
This page contains the following information:
Generally, to be considered “commission wages”:
However, commission wages aren't strictly limited to a percentage of products or services sold. In some circumstances, employers may base commissions on other factors, such as overall company revenue or net profit.3
Employers need to be cautious because the Office of the Labor Commissioner notes that many employees who receive payments based on performance of services are actually receiving a piece rate, not a commission. The Labor Commissioner has also stated that pay plans where employees share in a percentage of the profits of a store often aren't receiving a commission, but a hybrid hourly plan based on profits.4
Employers should also make sure the employee meets the first part of the test and is actually engaged in selling goods and services.
Although commissions are considered wages under the California Labor Code, an employee's right to commission payments depends on the terms of the commission agreement between the employer and the employee.5
For more information on the commissioned inside sales exemption, see Commissioned Inside Sales Employee Exemption.
For information on commissions agreements in the barbering and cosmetology industry, see Wage and Hour Requirements for Specific Industries.
The law applying to employers who pay commission wages to employees, requires that:6
If the contract expires and the employee continues working for the employer, the terms of the expired contract are presumed to remain in effect.
For purposes of this law, the definition of “commissions” does not include:
An example of a “temporary variable incentive payments” is a car dealership that offers a short-term sales incentive for a limited number of vehicles for sale for an upcoming weekend. The law allows dealers to offer such temporary incentives without triggering a completely new commission agreement each time, as long as the incentive increases and doesn’t decrease such commissions.
The commission agreement you use is specific to your organization and the particular employee involved. The agreement should contain, among other things, specific details relating to computation of the commission, any conditions required before commissions are earned and advances. Boilerplate agreements not specific to the particular employee(s) involved are generally insufficient.
Detailed commission agreements are important because they establish how employees will earn commissions, including any conditions that apply to the payment of the commissions. Failing to address conditions on payment in the agreement may preclude an employer from disputing that commissions are owed.
Detailed commission agreements are important because they establish how employ-ees will earn commissions, including any conditions that apply to the payment of the commissions. Failing to address conditions on payment in the agreement may pre-clude an employer from disputing that commissions are owed. 7
The employee, a union member, worked under a collective bargaining agreement (CBA) between the union and the employer. The CBA contained information on when a commission was earned, the conditions that had to be satisfied for a commission to be earned, and deductions for commission advances. The employee was given a new customer account because of a clerical error, made a large sale and was paid the full commission. Under the CBA’s terms, the employee was not entitled to sell advertising to new customers and the union protested the payment of the commission.
The employer began deducting from the employee's wages as repayment of the commission. The employee resigned to stop the deductions and sued the employer for violation of Labor Code section 221.
California Labor Code section 221 prohibits employers from engaging in “self-help” by withholding from an employee's wages any money owed to the employer. However, a written commission agreement can provide for an advance on commissions and a charge-back for recouping commission advances if the conditions required for payment of a commission aren't met. For more information on making proper deductions, see Deductions from Wages.
The court concluded that Labor Code section 221 doesn’t prohibit an employer from recouping commission wages paid if the conditions of the contract aren’t met. However, once the employee meets the conditions expressed in the commission contract, the commission is considered a wage and the employer cannot engage in “self-help” and deduct the already earned and paid money from the employee’s wages — whether it was a commission or other wages.
Employers should ensure that their written commission agreements include all conditions that must be met before a commission is “earned,” and detail when and how commission payments are made.
In some situations, the commission payable to the employee is based on a pool arrangement. Under this arrangement, a group of employees, all of whom must be engaged principally in selling the products or services on which the commission percentage is based, share in the pool. Such an arrangement constitutes a commission scheme if all other requirements of the law are met.
A commissioned employee can receive a sum of money that is intended as an advance, draw or guarantee against the expected commission earnings. In California, employers must pay these sums at least twice a month. If an employee receives a draw against commissions to be earned at a future date, the “draw” must be equal at least to the minimum wage and overtime due the employee for each pay period (unless the employee is exempt, i.e., primarily engaged in outside sales).8
These sums are usually a smaller amount of money than what the employee is expected to earn in commissions. If the commission earnings for that period are greater, the smaller amount is deducted from the commission earnings when the commissions are reconciled. For example, an employee is paid $2,000 per month as an advance. The employee earns $5,000 in commissions for the month. The $2,000 advance is deducted from the commission payment and the employee receives the $3,000 commission payment plus the $2,000 advance.
Although the draw may be reconciled against earned commissions at an agreed date or when the commission is earned, the draw is considered the basic wage and is due for each period the employee works even though commissions do not equal or exceed the amount of the draws, unless there is a specific agreement to the contrary.9
However, there must be a specific written commission agreement that states advances will be repaid out of future commissions. Failure to have an agreement will result in the advance being considered payment in lieu of salary and therefore the employee’s minimum compensation.
Reconciliation of draws against commissions are to be construed according to the contract of employment but must be completed within a reasonable time depending on the transactions involved.10
A California Court of Appeal clarified an employer’s obligations under a commission compensation plan that permits “chargebacks” against commission advances. According to the court, chargebacks on advances do not constitute an unlawful underpayment of wages, and any chargeback formula must be clearly stated and communicated to employees.11
The plaintiff worked as a sales representative and was paid an hourly wage plus monthly commissions on the number of cell phone service plans he sold. The employer’s compensation plan stated that it would pay sales representatives their commissions at the time a customer purchased a cell phone (an “advance”), but that representatives did not earn the commission until the customer kept the phone for a specified period of time (the “chargeback period”).
Key to the court’s decision was the definition of an “advance” against future commissions. Sales commissions are wages, but an employee’s right to the commission depends on the terms of the compensation contract. An advance against a future commission is not a wage, because all conditions for the employee to become entitled to payment have not yet been satisfied. The court noted that a payment is an advance when the employer “cannot determine whether the commission will eventually be earned because a condition to the employee’s right to the commission has yet to occur ....”
The court stated that the commission payments to the employees were lawful advances, not wages. The compensation plan clearly stated that employees did not earn their commissions at the time of the sale of a cell service plan, and referred to all up-front payments to employees as “advances.” Therefore, the policy of reducing the next advance for a customer’s cancellation of service during the chargeback period did not underpay “wages.”
Many commission plans state that certain conditions must be met before the commissions are payable, creating forfeitures. A distinction must be drawn between compliance with the conditions and forfeitures.
As a general rule, the employee must complete the condition to be entitled to recover the commission wage. Unless you prevented the employee from completing the condition — for example, by discharging the employee before the commission is earned — or the condition is impossible to complete as a result of conditions beyond the parties’ expectations, the employee’s failure to complete the condition will result in no commission being owed.
Courts do not favor forfeitures. Unless the language about the forfeiture is clear and unambiguous, the courts will not enforce the language if any logical reading of the contract would avoid the forfeiture. But if the forfeiture is clearly provided in the contract’s language or the parties’ agreement is within the parties’ expectations and doesn’t violate public policy, the forfeiture is valid and enforceable.
In one case, the court ruled that an employer can lawfully deduct unearned commissions from future compensation advances without violating the California Labor Code. The case involved a commission plan for a newspaper’s telephone salespeople. The agreement provided that commissions were not earned until the employer approved the sale and the customer maintained the subscription for at least 28 days. If subscriptions were canceled within 28 days, the employer could deduct chargebacks from subsequent pay. The court held that the chargebacks were not unlawful because the commissions were contingent on the customers subscription lasting at least 28 days, per their agreement.12
But a different result occurred in another case, which involved chargebacks for canceled subscriptions. The employer's policy said that any subscription canceled within 16 weeks would result in the full point value of the commission being charged back to the salesperson. The court found the policy was unclear as to whether the commission was earned at the time of the sale or after the 16-week mark. Because the court found the agreement was unclear, the employer lost its summary judgment motion and the employees could proceed with the case.13
As these cases illustrate, the parties' agreement and the parties' expectations are critical in determining if a forfeiture will be allowed.
Like all nonexempt employees, commissioned employees must be provided with paid rest breaks. If you pay employees on a commission basis, those employees must be paid separately for their rest breaks.14
In one case, the company's commission plan ensured that employees always received more than the minimum wage for every hour worked through advances and draws on commissions. The plan stated that, “The amount of the draw will be deducted from future Advanced Commissions, but an employee will always receive at least $12.01 per hour for every hour worked.” If the commissioned sales associate failed to earn a minimum pay of at least $12.01 per hour in commissions during any pay period, then the employee was paid a “draw” against future advanced commissions. However, the plan did not directly compensate sales associates for rest periods.
The court stated that the advances or draws against future commissions “were not compensation for rest periods because they were not compensation at all. At best they were interest-free loans.” The plan did not contain any component that directly compensated sales associates for rest periods, even though sales associates kept track of this time.
The court held that Wage Order 7 requires employers to separately pay covered employees for rest periods and that this requirement applies to employees paid on commission. This case is similar to previous cases that ruled that piece rate workers must be paid separately for rest breaks. For more information, see Piece Rate Pay.
In some circumstances, outside commissioned salespeople are exempt from minimum wage and overtime requirements. An outside salesperson is someone who spends more than half of their working time away from the employer's place of business selling or obtaining orders for a product or service. For more information, see Outside Salesperson Exemption.
An inside salesperson sells merchandise in a store or sales lot or sells a product or service via an organization’s telephone. Inside salespeople are nonexempt, therefore, minimum wage and overtime apply, with narrow exceptions noted below. An inside salesperson who is paid by commissions is entitled to minimum wage pay each week if their commissions during the 40 hours of the workweek add up to less than the total of 40 hours multiplied by the minimum wage. You cannot recover this money even if the inside salesperson goes on to have a string of unsuccessful sales weeks and then leaves the job having earned less in sales than they were paid in minimum wage.
You must pay commission wages to vehicle salespeople at least once per month.15
Employees working under Wage Order 4 (Professional, Technical, Clerical, Mechanical and Similar Occupations), and Wage Order 7 (Mercantile Industry), mat be exempt from overtime requirements under California law if their earnings exceed 1.5 times the minimum wage and more than half of the employee’s compensation represents commissions.16 The employee must also meet one of the federal exemptions to be exempt from federal overtime requirements.
For more information, see Commissioned Inside Sales Employee Exemption.
California law doesn’t require you to provide vacation benefits. If you do provide vacation benefits, they are considered deferred wages and are earned and vested, or accrued, as an employee works. At the time employees terminate employment for any reason, they are entitled to be paid for all earned but unused vacation. If you have a paid time off (PTO) program that includes vacation benefits along with other sick leave or other wage replacement benefits, the entire accrual of PTO must be treated as vacation.
There is no specified method under the law for employers who offer vacation benefits to commissioned employees to compute the dollar value of accrued vacation leave. You can base vacation pay on an average earnings figure over a reasonable time period or pay a set hourly amount regardless of actual normal earnings.
For more information on Vacation and PTO, see Vacation, Paid Time Off and Holiday.
1. Lab. Code sec. 204.1; Keyes Motors, Inc. v. DLSE, 197 Cal. App. 3d 557 (1988)
2. Keyes Motors, Inc. v. DLSE, 197 Cal. App. 3d 557 (1988)
3. Muldrow v. Surrex Solutions Corp., 208 Cal. App. 4th 1381 (2012)
4. DLSE Enforcement Policies and Interpretations Manual sec. 2.5.4 and sec. 34.1.2
5. Lab. Code sec. 2751; see Nein v. HostPro, Inc., 174 Cal. App. 4th 833 (2009)
6. Lab. Code sec. 2751
7. Sciborski v. Pacific Bell Directory, 205 Cal. App. 4th 1152 (2012)
8. DLSE Enforcement Policies and Interpretations Manual sec. 34.2
9. Agnew v. Cameron, 247 Cal. App. 2d 619 (1967)
10. DLSE Enforcement Policies and Interpretations Manual sec. 34.2.1
11. Deleon v. Verizon Wireless LLC, 207 Cal. App. 4th 800 (2012)
12. S teinhebel v. Los Angeles Times Communications, 126 Cal. App. 4th 696 (2005)
13. Harris v. Investor’s Business Daily, Inc., 138 Cal. App. 4th 28 (2006)
14. Vaquero v. Stoneledge Furniture, LLC, 9 Cal.App.5th 98 (2017)
15. Lab. Code sec. 204.1
16. IWC Wage Orders 4 and 7 sec. 3