How do we calculate vacation pay for our commission-only, outside sales staff?

You have several options.

• Time off without vacation pay.
  For example, you can have a policy where an outside salesperson can have two weeks off per year without pay other than commissions that are due to be paid during the vacation time off period.
• Set a fixed dollar amount to be paid during the vacation period.
  For example, you can offer your outside sales staff a set amount, such as $500 per week. Your employee would then receive $1,000 for their two-week vacation period, plus any earned commissions due during that period.
• Offer vacation benefits based upon an average of past earnings.
  For instance, use a base, such as the prior year, and divide by 52. Use this figure for the weekly vacation benefit. Suppose an employee earns $60,000 the prior year; divide that by 52 and that leaves $1,153.85 per week. Your employee would then be paid $2,307.70 plus what commission is due in that period. You can certainly use a different base than the prior year. Using the prior year as a base, however, probably gives a fair indication of a person’s weekly average if this is what you are trying to accomplish.

In the first option, you don’t have to cash-out vacation pay upon termination because only time off is promised. The only pay obligation is the promise to pay earned commissions.

The second and third options are different in that time off with pay is in the employment agreement. These are vacation wages, which vests on a daily basis. You are obligated to cash out on termination all unused, accrued vacation.

The third option is potentially troubling because of the payout provisions of Labor Code Section 227.3. What if the outside salesperson is in their second year, is earning more than the first year and is terminated? What does that do to the final rate that is in Labor Code 227.3? You should consult with your labor and employment attorney before going with this option.

Read more about Commissions in the HR Library.