California Wage Law
California Labor Law assists employees in collecting their commission wages and limits the deductions an employer may take.
California Commission Laws
Commissions arise from the sale of a product or service but not the making of a product or the rendering of a service. In order to be a commission, the compensation must be a percentage of the price of the product or service sold. The person receiving the commission must be “principally” involved in selling the goods or the services from which the commission arises. Commission plans which refer to a percentage of a business, such as the cost of the goods sold by the business, do not constitute a commission wage.
Commissions arise out of agreements between the employer and employee and are not required by any law. How they are computed also is determined by the agreement, but deductions against commissions are limited by labor law.
People often confuse commissions with bonuses or piece rate plans. A bonus is a payment in addition to a regular wage, and a bonus can be required by agreement or be discretionary. They are not predicated upon the price of a particular product or service, but are usually based on reaching minimum sales or making a minimum number of pieces.
When an employer terminates an employee, can the employee still receive commissions?
Generally, the answer is yes. California courts have a policy against forfeitures, and they don’t want people to give up what they rightfully earned. If some work remains to be completed to earn the commission, California law directs the court to give a pro rata share to the terminated employee. In other words, once the sale is secured, the employer cannot avoid payment by getting rid of the employee.
What about an employee who quits?
They might earn commissions depending on how much work is left to be done to complete the sale. If the contract for the commissions is clear and unambiguous, and substantial work remains to be done in order to complete the sale, the employee who voluntarily quits without finishing the work might not be entitled to commissions.
What are permissible deductions against commissions?
As stated above, commissions arise out of contract between the employer and the employee. The commission may be based on either gross sales figures or net sales figures.
However, under California law, the employer’s cost of doing business cannot be deducted from commissions or any other pay plan. For example, one California case holds that an employer cannot deduct damages to goods caused by the customer or returns of products that were credited to other employees. As with all other wages, California law prohibits deduction from commission for cash shortages, breakage, loss of equipment, and other business losses that may result from the employer’s negligence.