If you hold a sales job in California, knowing the state laws on commission-based wages is essential. Your employer must follow specific rules that are unique to California, laws meant to protect employees in sales jobs where their wages, in large part, depend on commissions.
First, how does California define commissions? In 1988, the California Court of Appeals held that:
- Commission wages come from the sale of a product or service and not from making a product or providing a service.
- Commission compensation must be a percentage of the price of the product or service sold.
Legislation approved in 2013 determined that a written contract is required for commission-based employment that sets forth “the method by which the commissions are to be computed and paid.”
- The employee must be given a copy of the contract and sign a receipt that they received it.
- Once that contract is in place, all commissions earned under the agreement must be made to the employee.
- When the contract expires and the employee makes additional sales, the contract is legally still in effect.
- If a new contract is signed, any sales made prior to it must be paid according to the original contract.
- An employer may base future employment on the employee signing a new commission contract.
So, what does this mean for a California resident in a commission-based sales job? It depends on the commission contract between you and your employer. A contract may state that commissions are earned when a sales agreement is executed. Or it may pay a commission after the customer pays for the goods or services.
Having an attorney who specializes in employment law review the contract before signing can give future protection against reduced or lost commissions. And, if your employer is not honoring the agreement, finding a skilled employment attorney to help you recoup any lost commissions is crucial.
Whatever the terms of your commission contract, your employer cannot reduce your commission or withhold it except under specific circumstances.
A commission contract may state that you must be currently employed by your employer in order to receive your earned commission wages. So if you quit or are fired before the commission is paid, you forfeit it.
Because most California courts hold that commissions can be contingent on future events, like continued employment with the company, you should carefully consider signing a commission-based wage contract that contains forfeiture language. And because at least one court has hinted that forfeiture provisions can be unenforceable, you or an employment attorney can help you negotiate for its removal from your contract.
Costs Related to Sales
A commission contract may require deductions from your earned commission to cover costs directly associated with the sale.
The agreement you signed may state that certain deductions will be made from your commission, like the cost of shipping, free products offered by the salesperson to help close the sale, or the cost of the product sold.
Indirect costs can’t be deducted from commission wages, however. These include general overhead expenses and general business expenses like electricity.
In addition, employers can’t shift the cost of business to the commission employee. At least one California court held that a credit card fee or employee use of a company telephone couldn’t be used to reduce commissions. The court considered both to be part of the employer’s cost of doing business.
It’s legal in California for commissions to be contingent on events occurring after a sale.
A commission contract can state that commissions must pay back any commission earned on merchandise that is later returned. However, the return must be directly attributable to the employee — that is, the employer has to identify that the sale came from a specific employee in order to “take back” the earned commission.
Advances and Draws
Some contracts require the employer to pay an advance towards commission wages that have yet to be fully earned. But the contract may also require an advance to be returned if sales commissions don’t equal or exceed the amount advanced.
If your contract doesn’t require advances to be paid back, they are legally viewed as employee wages.
However, advances are legally prohibited if commission earnings are unpredictable and the reasons for a lost sale would be beyond the employee’s control.
Are you concerned that your commission contract contains provisions that could jeopardize your commissions? Or is your employer reducing or demanding you return commissions you think you’ve rightfully earned?
The attorneys at LawPLA are here to help you with all employment-related legal issues, including any illegal with holding of commission-based wages. Just call either of our Los Angeles offices or use our online contact form to schedule a consultation.