Many of our workers are compensated through commissions. We have had a lot of trouble calculating their final pay if they leave the company. How do we figure out which commissions they are owed (e.g., for sales that are closed but not yet paid or for sales in which they participated but that haven’t closed)? We usually don’t pay salespeople commissions until the customer pays, and then, if the order is subsequently canceled, we deduct for that. So how do we handle it for final paychecks? — Althea C., HR Manager in Eureka
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.
These questions are typical ones asked by employers who have commissioned employees and whose commission plans are silent on these issues. Employers should remember that they must pay an employee’s unpaid wages immediately if he or she is discharged—the employee is fired, his or her fixed employment term ends, or the employee completes the specific assignment for which he or she was hired. If the employee quits or resigns, employers must pay unpaid wages within 72 hours, unless notice of the resignation was provided more than 72 hours before the resignation date. And, the Ninth Circuit Court of Appeals recently ruled that employers have to pay out commissions immediately at the time of discharge unless the commission is contingent upon an event that hasn’t yet occurred. The key to avoiding uncertainty about final commission payments is to draft a clear commission agreement.
A commission agreement should spell out when commissions are “advanced” and when they are considered “earned.” Are commissions advanced or earned when the employee books the sale or when the customer actually pays? How long will “chargebacks” or reconciliations be permitted? Many employers state in their agreements that commissions are not considered earned until the customer has paid the invoice.
Once the commission is considered earned, the normal rules for paying employees their wages under California Labor Code Section 204 apply: Commissions earned between the first and 15th day of the month must be paid between the 16th and 26th day, and commissions earned between the 16th day and the last day of the month must be paid by the 10th day of the following month.
Some plans “advance” commissions when a sale is booked, and then, if the sale falls through or the customer cancels the order, the commission is “charged back” and offset against other earned commissions.
California court decisions involving advances and charge backs have emphasized that these arrangements must be carefully drafted. If the commission agreement is clear that commissions are being advanced and are not considered earned, a court will usually enforce the charge backs. On the other hand, if the agreement is ambiguous about whether the commissions are advanced or earned under the plan, the court may consider the commissions to be earned, and future charge backs will be considered illegal deductions.
Applying these principles to Althea’s questions, the answers depend on how the commission agreement is drafted. If the person’s employment ends and the sale is closed but not yet paid for, and the agreement is clear that commissions are not considered earned until they are paid for, the commissions are not due to the employee until the customer pays the bill. At that point the employee would be entitled to his or her commission pay.
For deals the employee participated in that have not closed, there are no clear guidelines. The Labor Commissioner’s Policy Manual suggests that if the employee has done some work on a particular sale, that employee is due a pro rata share of the commission when the deal ultimately closes. Many commission plans contain specific provisions permitting a company official in his or her discretion to pay the employee a portion of the commission if in fact he or she worked on the deal before leaving the company.
With regard to the final question—a scenario in which the commission is not considered earned until the customer pays, but then, if the order is subsequently canceled, the commission is deducted from future commissions—as long as the agreement distinguishes between whether the commission is being advanced or earned, there should be no problem before employment ends. In the cases mentioned above, commissions were advanced, but if the customer canceled within 30 days, a legal chargeback occurred and the commission was recaptured.
These issues become difficult when the money has already been paid. There is no obvious answer. You must first consider the product that the person is selling and how many products are sold on which commissions are earned. At some point, there has to be a time limit when the sale is considered final and the commission considered earned with the risk of loss shifting from the employee to the employer should the customer return the product. If there is no definitive time limit setting a date for the commission to be considered earned, it is likely to be interpreted against the employer.
Lloyd W. Aubry, Jr., Esq., former California labor commissioner, is of counsel at the San Francisco office of the law firm Morrison & Foerster LLP.