Mandatory and Discretionary Payment
Under California law, commissions are compensation paid based on the value of the employee’s sale of a good or service.
Similarly, there are compensation plans that reward employees based on certain standards of employee performance. For example, in the mortgage industry, some compensation plans reward employees for types of loans and the number of loans in a specific period. Under California case law, they are not technically commissions, but payment is mandatory.
The promise to pay an employee may be in a written contract, a compensation plan given to the employee, or even just a spoken agreement. Once the parties make the agreement and the employee fulfills the appropriate condition, the employer must pay the commission.
On the other hand, discretionary bonuses cannot be enforced in court. Some examples are Christmas bonuses and year-end bonuses. In those circumstances, the employer has made no promise to the employees and has no criteria for setting these bonuses. Rather, the employer assesses the employee’s performance after the work has been performed and makes the decision of if and how to compensate the employee. If there is no mandatory obligation to pay the commission, then the commission cannot be enforced in court.
Commission cases often involve disputes about the parties’ agreement. For example, commissioned employees are often hired on the basis of “on-target earnings,” with a detailed commission plan to be determined at a later date. When the plan is developed, the provisions may be different from the parties’ earlier agreement. The following concepts are involved in California contract law cases:
- An employer cannot rewrite the terms of the commission agreement once the sale or performance has been made.
- When an employer reserves the power to make periodic changes to its commission plans, there are limits on its power: an employer cannot use its discretion to deny the employee the benefits of the commissions contract.
- If a contract can be reasonably interpreted to avoid forfeiture of an earned commission, a court is obligated to interpret it that way. All of the terms of a written agreement are considered.
In some situations, a court will make a determination that a clause in a commissions contract cannot be enforced, and the court will “strike it” from a commissions contract. In California law, this is called the doctrine of “unconscionability.” These claims may arise when the commission plan requires an employee’s current employment as a condition for payment of an earned commission.
Some states, such as Texas, will enforce any contract no matter the circumstances of making the contract.
Class Action Cases
Commission cases under California law can be class actions. These clients have small claims for commissions. Under many States’ laws, commission cases are ideal class-action lawsuits because the clients have small claims and many employees have labored under the same commission plan.