Many companies pay their employees in commissions, typically their sales people. A commission agreement should thoroughly explain the basis on which commissions will be paid and include examples of commission computations. (Labor Code § 2751(a).) A company that willfully fails to enter into a written contract with the required explanation is liable for treble damages. (Civil Code § 1738.15.) A “willful” failure does not require any malice or even that the party be aware of the requirements of the Act but merely that the failure was intentional. (Baker v. American Horticultural Supply, Inc. (2010) 186 CA4th 1059.)
To be a true commission, it must be based on either net or gross sales figures and must be a percentage of the price of the service or product that is sold. (2002 Division of Labor Standards Enforcement Policies and Interpretations Manual §34.1 (rev 2009).) In addition, the employee receiving the commission must be principally involved in selling the goods or services on which the commission is measured. (DLSE Manual §34.1.2.) The employer’s cost of doing business must not be considered when reaching the “net” sales figures on which commissions are based.
Many companies fail to pay commissions to their employees upon termination. Sometimes, the individual’s entitlement to payment of post-termination commissions depends on how much work remained to be done for the customer and what the circumstances were surrounding the termination. Several of the factors that may be relevant to whether a company must pay a former employee for commissions are:
- When commissions are earned;
- How commissions are calculated and when they will be paid; and
- Whether payment of commissions following termination is addressed in commission policy.
If a commissioned employee is hourly and non-exempt, commissions (and bonuses) must be included in the regular rate of pay for overtime calculations whether they are the sole source of the employee’s compensation or are in addition to a guaranteed hourly rate. (29 CFR §§778.117, 778.208.) If a commissioned employee is salaried, their earnings must exceed one and one-half times the California minimum wage and more than half of their compensation must be in the form of commissions. (Wage Order Nos. 4–2001, §3(D) (8 Cal Code Regs §11040(3)(D)) and 7–2001, §3(D) (8 Cal Code Regs §11070(3)(D)).)
If you are a commissioned employee, you should consult with a knowledgeable wage and hour employment attorney to determine if you are owed compensation.