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What are my rights under California law if I earn commission wages?

By Thomas Lee

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What are my rights under California law if I earn Commission Wages?


Commission wages are compensation in the form of a percentage of the price of the product or service which is sold by an Employee. Alternatively, commission wages may be based proportionally on the number of products or services sold. California law (Labor Code §2751) requires that all commission plans be in a written contract and set forth the method by which the commissions shall be computed and paid. Employers are required to give a signed copy of the contract to every employee who is a party to the contract and obtain a signed receipt for the contract from each employee.


Don’t confuse a Bonus with Commissions


Bonuses are sometimes confused with commission wages. In order to qualify as a commission the scheme must meet the requirements of a “commission wage.” Bonuses do not depend upon the price of a particular product or service, but are usually based on reaching a minimum amount of sales or making a minimum number of pieces, and can be distinguished from a commission by that fact. Many times a bonus is paid to individuals who are not engaged in sales at all and is also, distinguishable by that fact.


Draws against Commission Wages Must Be At Minimum Wage Rate and Cover Overtime Wages


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). 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. Advances may only be recovered at termination if there is a specific written agreement to that effect and only to the extent that the advances exceed the minimum wage and overtime requirements.


What Needs To Be In The Commissions Agreement or Contract?


Commissions Contracts must include the commission computation. The commission may be based on either gross sales figures or net sales figures. As discussed below, certain criteria cannot be considered when reaching the “net” sales figures. If the element upon which the deduction from the gross sales is based is predicated upon a cost which is attributable to the employer’s cost of doing business, the element may not be used.


Computation of commissions frequently relies on such criteria as the date the goods are delivered or the payment is received. Sometimes, the commission of the selling salesperson is subject to reconciliation and chargebacks if the goods are returned. If these conditions are clearly and unambiguously stated in the contract, they may be utilized in computing the payment of the commissions.


Commission Plans May Not Involve Calculation Which Includes Costs Attributable To Doing Business


“Unidentified returns” which include all returns for which the absence of identification of a salesperson could have been the result of customer negligence or misconduct; returns for which the original salesperson can be identified but had not been employed in the past six months; returns of merchandise that was purchased at another store where the salesperson cannot be identified, and returns on defective merchandise, customer abuse, etc. are illegal.


Commission Plans May Not Provide For Deductions From Wages Earned


California law prohibits deductions from an employee’s wages for cash shortages, breakage, loss of equipment, and other business losses that may result from the employee’s simple negligence. Deductions of this nature would unjustifiably provide employers with self-help remedies that are not available to other creditors.


Illegal Commission Forfeitures


A commissions contract that provides for no commissions for sales or shipments on orders after termination of employment is absolutely illegal. For example, if an employee made a large sales in the fall for Christmas and the employer terminated him before delivery, the employer would be violation of California law and the commission wages earned must be paid to the terminated employee.


However, if the commissions contract is clear and unambiguous and there are substantial duties which must be performed in order to complete the sale, and the employee who voluntarily terminates without accomplishing those tasks, the employee does forfeit their commissions. Note that non-recovery is limited to cases involving questions of when a commission has been earned by a terminated employee on a “sale” transaction that is not an instantaneous event (as in the context of retail sales) but, rather, is “completed” over a relatively long period of time during which the sales agent may be required to perform additional services for the customer.


How can an Employment Law Help Me Recover My Unpaid Commissions?


Los Angeles Employment Attorney Thomas M. Lee has helped many clients over the past 22 years of his practice who did not receive their earned commission wages in addition to the related Labor Code penalties. Generally, a lawsuit for unpaid commission wages must be filed within 3 years. Call Thomas M. Lee at 213-251-5533 for a free legal consultation today.



Please note that the information provided on this website is for general information purposes only and is not to be construed nor relied upon as legal advice nor the formation of an attorney-client relationship. For a free consultation with Attorney Thomas M. Lee, please contact us.

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