Employees can be paid for their work in several ways. Hourly wages and fixed salaries are the most common examples. Some employees are paid a commission basis.
All California employees, including those who earn commissions, have the right to be paid for their work. They also have the right to be paid on time. And in some cases, they have the right to be paid overtime.
This article explains the rights of employees paid on a commission basis in California. Since each situation is different and the law can be complex, employees should seek the advice of an employment lawyer if they believe that a commission has not been properly paid.
- 1 Definition of “Commission”
- 2 Commission Agreements
- 3 “Earned” Commissions
- 4 How Commission are Calculated
- 5 Advances and Draws
- 6 Overtime Compensation and Minimum Wage
- 7 Meal Breaks and Rest Periods
- 8 Unpaid or Late-Paid Commissions
- 9 Wage Claims
Definition of “Commission”
In California, a commission is a type of compensation paid to a person for sales-related services they render. In a commission-based arrangement, the size of the employee’s compensation depends on the amount or value of the thing that was sold.1
The amount of the employee’s commissions is usually based on:
- A percentage of sales or profits made from sales,2 or
- The number of sales made.
Commissions are Not Discretionary
Commissions are wage payments that an employee is entitled to receive by virtue of making sales. A discretionary payment that an employer can choose to pay or withhold, such as a performance bonus, is not a commission even if it is computed as a percentage of sales or profits.3
Measuring Pay: Amount vs. Value
To constitute a commission, the employee’s wage must be directly tied to either:
- The amount of the goods or services sold, or
- The value of the goods or services sold.4
The term amount can refer to the quantity of goods or services sold, without regard to cost or value of the thing being sold.5 The term value refers to monetary value as opposed to other measures of value (such as merit or importance).6
A car salesperson is paid a flat rate for each vehicle sold. His pay constitutes a commission because it is determined by the amount of goods sold.7
A grocery store employee earns reward points for each shopping cart they bring back to the store. The reward points do not directly reflect the cost or amount of goods or services sold. The employee’s compensation does not meet the definition of a commission.
Commissions are Paid for Sales
Commissions are earned by selling a product or service.8 Employees who are not involved in sales do not earn commissions, even if their compensation is based on a percentage of a customer’s payment or on the amount of an employee’s production.9
An employee is involved in sales when they are involved in exchanging a product or service for money or something else of value. The definition of sales also includes sales-related activity, like when an employee attempts to influence customers or clients to purchase a product or service.10
A mechanic is paid a percentage of an hourly rate that the customer pays to the mechanic’s employer. This is not a commission because the mechanic is not selling his or her service—they are merely performing it.11
A worker at an employee-placement service is paid a percentage of the placement fee the employer receives when job candidates are hired by clients. This arrangement meets the definition of “selling” because persuading a client to hire candidates is “sales-related activity.”12
The terms under which commissions are earned are established by an agreement between the employer and the employee. That agreement is often part of a broader employment contract.13
When some or all of a California employee’s compensation is based on commissions, California law requires the compensation agreement to be in writing.14 The agreement must specify the way the commissions will be computed and paid.15
The employee must be provided with a copy of the written commission agreement. And the employer must ask the employee to sign a receipt as proof that the employee was given a copy of the agreement.16
Changes to the Contract
An employer can usually decide to implement a new commission agreement and can condition future employment upon the employee’s acceptance of the new agreement.17
But once a commission has been earned under an existing agreement, the employee has a right to be paid the earned commission. This is true regardless of how a new agreement treats commissions that the employee has not yet earned.18
When a commission agreement expires and the employee continues to make sales, the agreement is presumed to remain in effect. In other words, the employer must continue to pay commissions as provided in the contract until a new contract is made or employment is terminated.19
As explained by one California court:
“[T]here is in this state a fundamental and substantial public policy protecting an employee’s wages . . . .”22
The conditions that must occur before a commission is “earned” are defined by the terms of the commission agreement.23 Once those conditions have been fulfilled, the commission is considered a wage and the employer is legally-obligated to pay it the same way they would any other wage.24
For example, an agreement might provide that the commission is earned when a customer executes a sales agreement to purchase goods or services.
Other agreements might provide that a commission is earned when the customer pays for the goods that were sold, particularly when the salesperson’s duties include following through with the customer to assure that payment is made.25
Whatever the case, the commission agreement must specify when and how a commission is earned. Earned commissions must be paid within the time otherwise set by California law.26
How Commission are Calculated
There are many ways in which commissions can be computed. Examples include:
- Price Percentage. A commission might be based on a percentage of the price the consumer pays for products or services.
- Profit Percentage. A commission might instead be based on profit. This could potentially motivate salespeople to sell a product for the highest possible price.27
- Fixed Amount Per Sale. A commission agreement might provide for a flat rate payment based on the number of products sold.28
- Fixed-Floor. A commission agreement might provide for a minimum payment that the employee will receive on every sale. For example, a car salesperson might receive $300 for every car sold or 25% of the profit on the sale, whichever is higher.
- Mixed Agreement. Some commission agreements call for varying percentages that are tied to total sales, or total number of sales.
As can be seen, a salesperson can receive varying commissions, depending on the product sold or the geographical area in which the sale is made.
Whatever method is used to calculate the commission, the method must be specified in the commission agreement.
Advances and Draws
Some commission agreements require the employer to pay a salesperson an advance against commissions. Some agreements treat an advance (or “draw”) as the minimum compensation if commissions earned are less than the amount of the draw.
On the other hand, the agreement may require the employee to repay advances if the employee does not earn sales commissions that equal or exceed the amounts advanced. In that case, the advance is treated as a loan.29
If the advanced commission is treated as a loan, the employee may be required to pay some or all of it back to the extent it isn’t fully earned.30
If the agreement does not require the employee to repay an advance that is not covered by earned commissions, the advance is treated as wages rather than a loan and the employee is not required to repay it.31
As mentioned above, California law requires commission agreements to be in writing.32 So, a court is unlikely to require an employee to repay an employer’s advance unless the employee’s agreement to do so is in writing.33
Overtime Compensation and Minimum Wage
With the exception of outside salespersons (which are defined below), employees who are paid a commission are generally entitled to be paid minimum wage for hours worked.34
Employers must keep a record of hours that employees work to ensure they are paid a minimum wage.35
With certain exceptions (which are described below), most commissioned employees in California are entitled to be paid overtime when they work:
- More than eight hours in one day,
- More than 40 hours in one week, or
- More than six consecutive days in the same workweek.36
An employee’s overtime rate will usually be one-and-a-half times their regular hourly pay.37 This is sometimes referred to as “time and a half” pay.
But, if the employee works more than 12 hours in a single day or more than eight hours on the seventh consecutive day of work in the workweek, their overtime rate is twice their regular hourly pay.38
There are several types of employees that are exempt from overtime requirements. When any of the exemptions apply, the employee is not entitled to overtime.
Certain employees are classified “exempt” under California law, regardless of whether they earn a commission. An exempt employee is someone who occupies a job that is not subject to one or more sets of wage and hour laws.39
Employers are only entitled to claim an exemption when an employee “plainly and unmistakably” meets the standard required for the exemption.40 When doubt exists, the law generally requires the employee to be classified as nonexempt.
To meet the requirements of a generally-exempt employee, the employee must meet all of the following requirements:
- Be paid on a salary basis,41
- Be paid a monthly salary of at least twice the state minimum wage for full-time employment,42 and
- Be primarily engaged in the duties of white-collar employees that are professionals, administrators, or executives.43
The general exemptions that apply to all California employees are discussed in more detail here.
Commissioned Sales Exemption
California also exempts employees that fall under the “commissioned sales” exemption. This exemption applies to employees who:
- Earn at least one-and-a-half times the minimum wage,
- Earn more than half their income in the form of commissions,44 and
- Work in the mercantile industry (which includes retail jobs), or work in certain professional, technical, clerical, mechanical, and similar occupations.45
The commissioned sale exemption only exempts employees who satisfy both conditions during a pay period. If an employee earns less than one-and-one-half times the minimum wage during a pay period, the employee must be paid overtime compensation for overtime hours worked during that pay period.46
If an employee is regularly paid an hourly wage in one pay period and a combination of hourly wages and commissions in the next pay period, the employee cannot be classified as exempt during the pay period in which no commissions are paid.47
This last rule is important for salespeople who do not collect a commission until the customer pays for a purchase. They may be exempt during pay periods in which customers pay for purchases but nonexempt during pay periods when they collect no commissions.
Outside Salesperson Exemption
Outside salespersons are excluded from minimum wage and overtime laws.48 The outside salesperson exemption applies to employees who:
- Spend more than half their work time away from the employer’s place of business, and
- Earn commissions from sales of products, services, or use of facilities.
The employer’s place of business is any business location maintained by the employer, not just its principal place of business or administrative headquarters.49
Whether an employee spends more than half of his or her working time “selling” is not always clear. For example, an employee may sell products to a customer and later deliver those products to the customer.
When the employee devotes more time to delivering than selling, the employee cannot be classified as an exempt outside salesperson.50
Meal Breaks and Rest Periods
California employers are usually required to provide their employees with meal breaks and rest periods.51
- Meal Breaks. California employers must give employees who work more than five hours per day an unpaid 30-minute meal break. Employees who work more than 10 hours per day are entitled to a second 30-minute meal break.52
- Rest Periods. California employers must give employees a ten-minute rest break during the middle of each 4-hour work period. Employers are not allowed to make a deduction from wages for the time employees spend on a rest break that is required by law.53
As was the case with overtime wages, however, certain employees are exempt from meal break and rest period requirements.
Employees that are generally-exempt or that fall into the “outside salespersons” exemption described above are not entitled to meal breaks and rest periods.54
But, unlike the overtime exemptions, the commission sales exemption described above does not apply in the context of meal breaks and rest periods.55
The penalties for failing to provide required meal and rest breaks can be substantial.
When employers fail to provide an employee a meal break, they are required to pay the employee an extra one hour of pay at the employee’s regular hourly rate. The employee may only earn one extra hour per workday for their employer’s failure to provide them with missed meal breaks.56
Unpaid or Late-Paid Commissions
As noted above, the employment contract determines when a commission is earned. But once it is earned, California law determines when it must be paid.
Commissions must generally be paid during the first pay period in which the earned commission can reasonably be calculated. The Division of Labor Standards Enforcement takes the position that commissions are not “earned” until the information from which they can be calculated becomes available.59
When an employee is terminated or discharged, the wages earned and unpaid at that time are due and payable immediately.60
Immediate payment at the end of employment must also be given to employees who quit after giving notice at least 72 hours before their last day of work. Employees who do not give that notice must be paid their final wages within 72 hours after they quit.61
Again, these requirements are subject to the rule that commissions are not payable until they can be reasonably calculated.
If the failure to pay commissions on time after employment ends is willful, the employee is entitled wages as if the employee had continued to work for a limited period.62 That period begins on the date when payment was first due and continues until the date it is paid, for up to 30 days.63
Employees have rights when it comes to commission-based payments. If their employer violates their commission agreement, they can file a wage claim with the State of California’s Division of Labor Standards Enforcement.
Aggrieved employees might also have the right to file a lawsuit against their employer. An employment lawyer can evaluate those claims to determine an employee’s available remedies.
If you think you have been wronged, protect yourself and call the work lawyers of Smith & Lo at (310) 340-7677 to learn more about your legal options.
Labor Code § 204.1 defines commissions as follows: “Commission wages are compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.”Footnote 1
See Labor Code, § 2751, subd. (c)(3) [referring to “a fixed percentage of sales or profits as compensation for work to be performed”].Footnote 2
See Labor Code, § 2751, subd. (c) [excluding short-term productivity bonuses, bonus and profit-sharing plans that are not based on a fixed percentage of sales or profits, and “[t]emporary, variable incentive payments that increase, but do not decrease, payment under the written contract” from the statutory definition of a commission].Footnote 3
Labor Code, § 204.1.Footnote 4
Burden v. SelectQuote Ins. Services (N.D. Cal. 2012) 848 F.Supp.2d 1075, 1080 [“A commission is based proportionately upon an ‘amount’ where an employer pays an employee a uniform fee for each unit of property or service sold.”].Footnote 5
Harris v. Investor’s Business Daily, Inc. (2006) 138 Cal.App.4th 28, 38; Ramirez v. Yosemite Water Co., Inc. (1999) 20 Cal.4th 785, 804 [“[T]he amount of their compensation must be a percent of the price of the product or service.”], quotation marks omitted.Footnote 6
See Areso v. CarMax, Inc. (2011) 195 Cal.App.4th 996, 1007–1009.Footnote 7
Labor Code, § 204.1.Footnote 8
Keyes Motors, Inc. v. Division of Labor Standards Enforcement (1987) 197 Cal.App.3d 557, 563 [“[T]he employees must be involved principally in selling a product or service, not making the product or rendering the service.”], emphasis in original; Areso v. CarMax, Inc. (2011) 195 Cal.App.4th 996, 1003.Footnote 9
Muldrow v. Surrex Solutions Corp. (2012) 208 Cal.App.4th 1381, 1392 [describing sales as “persuad[ing] or influenc[ing] [clients] to a course of action or to the acceptance of something”], quotation marks omitted.Footnote 10
Keyes Motors, Inc. v. Division of Labor Standards Enforcement (1987) 197 Cal.App.3d 557, 563.Footnote 11
Muldrow v. Surrex Solutions Corp. (2012) 208 Cal.App.4th 1381, 1392.Footnote 12
California law defines an employment contract as “a contract by which one, who is called the employer, engages another, who is called the employee, to do something for the benefit of the employer or a third person.” (Labor Code § 2750.)Footnote 13
Labor Code, § 2751, subd. (a) [“Whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing . . . .”].Footnote 14
Labor Code, § 2751, subd. (a) [“[T]he contract shall . . . set forth the method by which the commissions shall be computed and paid.”].Footnote 15
Labor Code, § 2751, subd. (b) [“The employer shall give a signed copy of the contract to every employee who is a party thereto and shall obtain a signed receipt for the contract from each employee. 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.”].Footnote 16
See Labor Code, § 2922 [“An employment, having no specified term, may be terminated at the will of either party on notice to the other. Employment for a specified term means an employment for a period greater than one month.”].Footnote 17
See Labor Code, §§ 201, subd. (a) [requiring payment of earned wages after discharge], 204, subd. (a) [requiring payment of earned wages at least twice monthly], 221 [prohibiting employers from deducting amounts from an employee’s wages].Footnote 18
Labor Code, § 2751, subd. (b).Footnote 19
Labor Code, § 200, subd. (a); Sciborski v. Pacific Bell Directory (2012) 205 Cal.App.4th 1152, 1166 [“[S]ales commissions are considered ‘wages.'”].Footnote 20
See, e.g., Labor Code, §§ 201, subd. (a), 204, subd. (a), 221; see also Labor Code, § 203 [penalty for failing to pay wages on time].Footnote 21
Phillips v. Gemini Moving Specialists (1998) 63 Cal.App.4th 563, 574.Footnote 22
Koehl v. Verio, Inc. (2006) 142 Cal.App.4th 1313, 1335 [“A commission is ‘earned’ when the employee has perfected the right to payment; that is, when all of the legal conditions precedent have been met. Such conditions precedent are a matter of contract between the employer and employee, subject to various limitations imposed by common law or statute.”].Footnote 23
Sciborski v. Pacific Bell Directory (2012) 205 Cal.App.4th 1152, 1167 [“[O]nce the express contractual conditions are satisfied, the commission is considered a wage and an employer cannot recoup the commission once it has been paid to the employee.”].Footnote 24
See, e.g., Powis v. Moore Machinery Co. (1945) 72 Cal.App.2d 344, 354 [“It was not illegal to provide that commissions would be paid when and if the goods were delivered and paid for.”].Footnote 25
See, e.g., Labor Code, §§ 204 [general rule for timely payment of wages], 204.1 [commissioned car salespersons are due and payable once each calendar month].Footnote 26
For example, an employee who sells cars for a dealership might be paid 25% of the difference between the dealer’s cost and the price paid by the buyer.Footnote 27
A car dealership might, for example, pay their employees $300 per car sold.Footnote 28
Agnew v. Cameron (1967) 247 Cal.App.2d 619, 622 [“it is clearly the law in California that a salesman is required to repay the excess of advances made over commissions earned when there is an express agreement on the part of the salesman to repay such excess”].Footnote 29
See, e.g., Korry of California v. Lefkowitz (1955) 131 Cal.App.2d 389, 393 [holding employee to his agreement to repay advances].Footnote 30
Agnew v. Cameron (1967) 247 Cal.App.2d 619, 624 [“in the absence of express stipulation or convincing circumstances indicating a contrary arrangement, advances to an employee will be presumed to constitute payment in lieu of salary and to fix the employee’s minimum compensation”].Footnote 31
Labor Code, § 2751, subd. (a).Footnote 32
Sciborski v. Pacific Bell Directory (2012) 205 Cal.App.4th 1152, 1167 [“Because of the strong public policy protecting wages, an employer’s right to recoup an advance commission generally requires a showing that the employee agreed in writing to the specific condition . . . .”].Footnote 33
Cal. Code Regs., tit. 8, § 11040, subd. (4)(B) [“Every employer shall pay to each employee, on the established payday for the period involved, not less than the applicable minimum wage for all hours worked in the payroll period, whether the remuneration is measured by time, piece, commission, or otherwise.”]; Cal. Code Regs., tit. 8, § 11070, subd. (4)(B) [same].Footnote 34
Cal. Code Regs., tit. 8, §§ 11040, subd. (7), 11070, sub. (7).Footnote 35
Labor Code, § 510, subd. (a).Footnote 36
Labor Code, § 510, subd. (a) [“Eight hours of labor constitutes a day’s work. Any work in excess of eight hours in one workday and any work in excess of 40 hours in any one workweek and the first eight hours worked on the seventh day of work in any one workweek shall be compensated at the rate of no less than one and one-half times the regular rate of pay for an employee.”]; see also Labor Code, §§ 511, 514, 515.Footnote 37
Labor Code, § 510, subd. (a) [“Any work in excess of 12 hours in one day shall be compensated at the rate of no less than twice the regular rate of pay for an employee. In addition, any work in excess of eight hours on any seventh day of a workweek shall be compensated at the rate of no less than twice the regular rate of pay of an employee.”].Footnote 38
See Cal. Code of Regs., tit. 8, § 11040, subd. (1)(A).Footnote 39
Nordquist v. McGraw-Hill Broadcasting Co. (1995) 32 Cal.App.4th 555, 562 [“Exemptions are narrowly construed against the employer and their application is limited to those employees plainly and unmistakably within their terms.”]; Arnold v. Ben Kanowsky, Inc. (1960) 361 U.S. 388, 392 [80 S.Ct. 453, 456] [“We have held that [FLSA] exemptions are to be narrowly construed against the employers seeking to assert them and their application limited to those establishments plainly and unmistakably within their terms and spirit.”].Footnote 40
Cal. Code of Regs., tit. 8, § 11040; see also Negri v. Koning & Associates (2013) 216 Cal.App.4th 392, 400.Footnote 41
Labor Code, § 515, subds. (a)(c).Footnote 42
Labor Code, § 515, subd. (a) [“The Industrial Welfare Commission may establish exemptions from the requirement that an overtime rate of compensation be paid pursuant to Sections 510 and 511 for executive, administrative, and professional employees, if the employee is primarily engaged in the duties that meet the test of the exemption, customarily and regularly exercises discretion and independent judgment in performing those duties, and earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.”].Footnote 43
Cal. Code Regs., tit. 8, §§ 11040, subd. (3)(D), 11070, subd. (3)(D).Footnote 44
The commissioned sales exemption applies only in industries that are covered by certain Wage Orders issued by California’s Industrial Welfare Commission. Specifically, the exemption applies to employees covered by Wage Order No. 4 (the mercantile industry, which includes retail sales) and Wage Order No. 7 (“Professional, Technical, Clerical, Mechanical, and Similar Occupations”). Other than outside salespersons, any employee who is paid a commission and who is not employed in one of those industries and is not otherwise exempt must be paid for overtime hours worked. (Cal. Code Regs., tit. 8, §§ 11040, subd. (3)(D), 11070, subd. (3)(D).)Footnote 45
Peabody v. Time Warner Cable, Inc. (2014) 59 Cal.4th 662, 670 [“[A]n employer satisfies the minimum earnings prong of the commissioned employee exemption only in those pay periods in which it actually pays the required minimum earnings”].Footnote 46
Peabody v. Time Warner Cable, Inc. (2014) 59 Cal.4th 662, 668.Footnote 47
Cal. Labor Code § 1171 [exempting “outside salesman” from Industrial Welfare Commission coverage]; Cal. Code Regs., tit. 8, §§ 11040, subd. (1)(C), 11070, subd. (1)(C).Footnote 48
See DLSE Opinion Letter 1998.09.08 (Sept. 8, 1998) [“The ’employer’s place of business’ is not limited . . . to a principal place of business or an administrative headquarters.”].Footnote 49
Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785.Footnote 50
Labor Code, § 512, subd. (a); Cal. Code Regs. tit. 8, § 11040, subd. (11), 11070, subd. (11).Footnote 51
Labor Code, § 512, subd. (a); Cal. Code Regs. tit. 8, § 11040, subd. (11), 11070, subd. (11).Footnote 52
Cal. Code Regs. tit. 8, §§ 11040, subd. 12, 11070, subd. 12.Footnote 53
Labor Code, § 1171 [exempting “outside salesman” from Industrial Welfare Commission coverage]; Cal. Code Regs. tit. 8, §§ 11040, subd. (1)(C) & 11070, subd. (1)(C).Footnote 54
See Cal. Code Regs. tit. 8, §§ 11040, subd. (3)(D), 11070, subd. (3)(D) [exempting certain inside sales employees from entitlement to overtime compensation].Footnote 55
Cal. Code Regs. tit. 8, §§ 11040, subds. (11), (12), 11070, subds. (11), (12).Footnote 56
See, e.g., Labor Code, § 204.1 [commissioned car salespersons are due and payable once each calendar month].Footnote 57
Labor Code, § 204(a); Peabody v. Time Warner Cable, Inc. (2014) 59 Cal.4th 662, 668.Footnote 58
DLSE Opinion Letter 2002.12.09-2 (Dec. 9, 2002).Footnote 59
Labor Code § 201, subd. (a).Footnote 60
Cal. Labor Code § 202, subd. (a).Footnote 61
Labor Code § 203.Footnote 62
Labor Code § 203.Footnote 63