In California, employers must follow certain rules when paying employees by commission.
Many salespeople, financial advisors, real estate agents, and other types of employees earn much of their living through commissions. In California, the law protects your right to your earned commissions.
In this article, you'll learn what counts as a commission, when you must be paid, and whether you are entitled to commissions when you leave your job.
What Is a Commission?
Some employers use the term "commission" to refer to a wide variety of payments. However, legally speaking, a commission is earnings based on a percentage of the price of goods or services an employee is involved in selling.
A payment that is discretionary rather than mandatory (such as a holiday bonus, which may or may not be awarded, in whatever amount the employer decides is appropriate) is not a commission.
California Laws on Commission Pay
In California, commission pay is governed by a combination of state and federal laws. The main state laws in California covering commission payments are:
- California Labor Code Section 204: requires employees be paid any commissions at least twice a month.
- California Labor Code Section 2751: requires employers to provide a written contract to commission-based employees that details the method for calculating and paying commissions.
- California Labor Code Section 2752: requires that employees who work for commissions receive a signed copy of their commission agreement.
- California Labor Code Section 2753: requires that commission-based employees receive a written statement of their commissions earned and owed.
Fair Labor Standards Act and Commission Payments
The main federal law that covers commission pay is the Fair Labor Standards Act (FLSA). Under the FLSA, commission payments are usually considered part of an employee's regular rate of pay.
That means employees must be paid at least the minimum wage for all hours worked, including hours spent generating sales commissions. In addition, commission payments must be included in the calculation of an employee's overtime pay rate.
Does a Commission Agreement Have to Be in Writing?
If you are paid on a commission basis, in whole or in part, your employer must give you a written agreement explaining how your commissions will be calculated and paid (often called a "commission agreement" or "commission plan"). Your employer must obtain a signed receipt from you, acknowledging that you received the contract.
The terms of the contract will govern when commissions are earned, and therefore, owed to you. For example, if your commission is based on customer sales, the contract might state that commissions are earned when payment is received from the customer.
The contract will also determine how commissions are calculated (for example, what percentage of the sale you will receive, whether your percentage is based on the total purchase price or the net profit to the company, and so on).
Commissions and California Overtime Laws
If you're paid on a commission basis, you might not be entitled to earn overtime when you work more than eight hours in a day or 40 hours in a week (or in some cases, double time; see California Wage and Hour Laws for more information).
If you qualify as an "outside salesperson," then you are not entitled to earn overtime. An outside salesperson is someone who regularly spends more than half of his or her time out of the office, making sales or collecting orders or contracts for products or services.
Even if you don't qualify as an outside salesperson, you are not entitled to earn overtime if all of the following conditions apply:
- You work in the professional, technical, clerical, mechanical, or mercantile (retail) industries.
- You earn at least one-and-a-half times the minimum wage per hour.
- At least half of your pay comes from commissions.
Otherwise, you are entitled to earn overtime for extra hours worked, unless another overtime exception applies. To calculate your overtime, you must first figure out your hourly rate.
This could be either your usual commission rate or your total earnings for the week (wages plus commissions) divided by the total hours you worked during the week (including overtime hours). You are entitled to one-and-a-half times this regular rate for regular overtime hours; for double time hours, you are entitled to twice this regular rate.
When You Must Be Paid Commissions in California
Your written commission agreement will determine when your commissions are considered earned. This may be when you book the sale, but it's also legal for an agreement to state that commissions are due later, such as when the customer receives the products or services or pays for them.
Once your commissions are earned, however, California's regular payday laws apply. This means you must be paid at least twice a month, including any commissions that you've earned. For commissions earned between the 1st and the 15th of the month, you must be paid no later than the 26th of that month. For commissions earned between the 16th and the end of the month, you must be paid by the 10th of the following month.
When Your Employment Terminates
As noted above, your written commission agreement governs when your commissions are considered earned by you. If your employment terminates (because you quit, are laid off, or are fired), your employer must pay you all earned commissions. If you are fired or laid off, your employer must immediately pay you all commission amounts that can be reasonably calculated.
If you quit without 72 hours' notice, your employer has 72 hours to pay commissions that can be reasonably calculated. If you quit with 72 hours' notice, your employer must pay your commissions on your last day.
Unpaid Commissions in California: What to Do
If your employer refuses to pay you commissions that you've earned, here are some steps you can take to try to obtain payment:
- Review your employment contract and commission agreement. If you have a written employment contract or commission agreement, take a close look at it to understand whether your employer is truly in the wrong.
- Communicate with your employer. Before taking legal action, try resolving the matter informally with your employer.
- Keep a detailed record of your earnings and unpaid commissions. Document commission earnings and any unpaid commissions, including amounts and dates.
- File a wage claim. If your employer won't pay your earned commissions, file a wage claim with the California Division of Labor Standards Enforcement (DLSE). You can file a claim online, by mail, or in person. Strict time limits apply, so don't delay.
- Talk to an attorney. If you need help filing a wage claim, your unpaid commissions are substantial, or you want to file a lawsuit, discuss the matter with an experienced employment attorney.
Contact an Employment Law Attorney
It can be tough to tell whether particular payments really count as commissions, whether your employer's written agreement is fair and legal, and exactly how much you should receive when your employment ends.
If you have any questions about your commission compensation plan, talk to an experienced California employment lawyer. A lawyer can quickly tell you whether your wage and hour rights are being violated.
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