Under California Labor
Code Section 201, an employer that discharges an employee must immediately pay
out the employee’s unpaid earned wages. Not complying can subject the employer
to waiting-time penalties of up to 30 days’ pay. The obligation to pay on the
spot when you’re terminating employees sounds simple enough. But what if your
employees are paid on commission— do you have to hand over a final commission check
at the time of discharge? We’ll focus on a case that discusses this issue.
Final Commission Check
Daniel Pugel worked as a
financial advisor for Morgan Stanley in
California
Morgan Stanley took almost a month to give him his final commission check.
Pugel sued, claiming
that the company didn’t pay him his earned commission immediately on discharge,
as
law requires. The trial court dismissed the action, but now the Ninth Circuit
Court of Appeals has reversed that decision, ruling that Morgan Stanley was liable
for waiting-time penalties for the delay in Pugel’s final check.1
Delay Improper
The Ninth Circuit
explained that the Labor Code specifies that wages include amounts earned on a
commission basis. Thus, when Section 201 directs that wages must be paid immediately
on discharge, this includes commission payments.
The Ninth Circuit
rejected Morgan Stanley’s argument that the California Division of Labor
Standards Enforcement (DLSE) permitted the company to delay final commission
payments until sometime after the discharge. The court explained that the DLSE
permits a delay only when the commission is contingent upon an event that hasn’t
yet occurred.
But here, there was no
evidence that Morgan Stanley couldn’t comply with Section 201, said the court. Morgan
Stanley contended that payment to Pugel was properly delayed because the
company sometimes had to make end-of-month adjustments to reflect situations in
which a client prepaid fees, because employees were only entitled to a
commission on such prepayments if still employed when the fee would actually have
been due. But there was no evidence that Pugel’s final commission was actually
contingent on this prepaid fee situation or other conditions. Furthermore, even
though Morgan Stanley’s practice was to wait until the end of the month to make
commission calculations, this didn’t mean that Pugel’s commission could not
have been reasonably ascertained at the time he was discharged.
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What to Do
To avoid waiting-time
penalties when an employee is discharged, it is critical that you follow the
state’s final paycheck rules. In particular, you must pay an employee’s final
wages immediately on discharging him or her—whether the employee is fired or is
leaving either because a fixed term of employment has ended or the employee has
completed the project for which he or she was hired. You must hand the employee
a check at the place of discharge for the full, unpaid amount of the wages—including
accrued vacation—through that final workday. If the employee quits or resigns,
you have up to 72 hours to pay the final wages. Also, there are some special
final paycheck rules for motion picture, oil drilling, and state employees, as
well as for layoffs of certain seasonal employees.
When a commission is
involved, this ruling makes it clear that it is due immediately on discharge,
just like other wages, unless the commission has not yet been earned because a
condition hasn’t been satisfied. To determine whether the commission has been
earned, be sure to refer to your written commission policy and agreements,
which should clearly spell out when a commission is earned.
_
1 Pugel v. Morgan
Stanley, U.S.C.A. 9th Cir. No. 04-57154, 2007 (unpublished)