Commissions – what you need to know

Good ole’ common law provides that: “He who shakes the tree is the one to gather the fruit.” (E. A. Strout Western Realty Agency, Inc. v. Lewis (1967) 255 Cal.App.2d 254, 259, quoting Sessions v. Pacific Improvement Co. (1922) 57 Cal.App. 1, 18; see also DLSE, Enforcement Policies and Interpretations Manual, supra, § 34.6.)

Further, it has long been the rule that termination (whether voluntary or involuntary) does not necessarily impede an employee‟s right to receive a commission where no other action is required on the part of the employee to complete the sale leading to the commission payment. (See Willison v. Turner Resilient Floors (1949) 89 Cal.App.2d 589.)

California’s Labor Code § 204.1 defines a commission as wages paid for the sale of a product or service and which is paid as a percentage of the price of the product or service. To be a true commission the two parts of the definition must be met. Compensation based on a percentage of the cost of the goods or services is not commission. Likewise true commissions are not paid for making the product or rendering the service.

Some commissioned employees are exempt from overtime. In California’s Wage Orders 4 and 7 commissioned employees who earn more than half of their wages as commissions and make at least one-and-one-half times minimum wage are exempt from overtime. Under federal law these employees must be engaged in “retail or services”. This restricts the California exemption to those engaged in “retail or services” who also meet the conditions listed above. Generally, it covers commissioned inside salespersons. This is an exemption from overtime, but not from minimum wage or other sections of the Wage Orders.

This limited exemption should not be confused with the exemption available for outside salespersons. Outside salespersons are those who customarily and regularly work more than half the working time away from the employer’s place of business selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities. The outside salesperson is exempt from both overtime and minimum wage. There is no requirement for how the outside salesperson is paid.

Commissioned employees who are not exempt from overtime and receive only commission must be paid overtime at an hourly rate calculated by dividing the commission by all hours worked. This rate cannot be less than minimum wage. If a non-exempt employee is paid an hourly wage or on salary in addition to the commission the overtime must be recalculated when the commission is paid because the true hourly rate is now higher and the overtime premium was not paid at the correct rate.

The California Supreme Court in Peabody v. Time Warner Cable, Inc. held that as set forth in Labor Code Section 204, all wages, including commissions, be paid at least twice during a calendar month. The only statutory exceptions for this pay frequency apply to employees of licensed vehicle dealers, employees covered by collective bargaining agreements and certain white-collar exempt employees.

Deductions from commissions may not be made for costs of doing business. The cost of doing business includes cash shortages, breakage, loss of equipment and other business losses that may result from the employee’s simple negligence. Likewise returns cannot be deducted from commissions when the original salesperson cannot be identified, or when the return is due to defective merchandise or customer abuse.