If you pay commissions, keep in mind that California Labor Code section 2751 requires that all employers who use commissions as a means of compensating employees provide those employees with a written agreement which sets forth the method by which the commissions will be calculated and paid. Further, the written commission agreement must be signed by the employer and each employee must acknowledge receipt of the agreement by signing for the document. The term “commission” is defined by statute. Accordingly, employers cannot get around the requirement of having a written commission agreement by simply calling the payment a “bonus” instead of a “commission.” California Labor Code section 204.1 defines commission wages as “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.”
Unfortunately, California law pertaining to what is and is not allowable with respect to commission plans can be complicated and confusing. A well drafted commission agreement should clearly explain when a commission is considered “earned” so as to eliminate problems associated with the timing of commission payments including issues related to the employer’s obligation to pay additional commissions after the employment relationship ends. “Draws” and “advances” of anticipated commissions must be properly addressed in order for an employer to be able to recover monies paid to employees for commissions that were never actually “earned.” In addition, employers must be careful when dealing with commissions based on “net” profits as there are certain operational costs that California law does not allow employers to consider when determining the profit on a transaction for the purposes of calculating commission entitlement. Care should also be taken with “bonus” programs to make sure they are not really commission plans subject to the requirements of Section 2751. Finally, when drafting a commission agreement, the employer should take the opportunity to consider whether the commissioned employees can properly be considered exempt from the overtime pay requirements and, if not, how overtime pay will be calculated. Given the risks associated with an improperly structured commission plan, it is recommended that all employers discuss the written commission agreement requirements with legal counsel and determine how best to proceed.
For more information about the recommended method for structuring commission plans and the requirements of California Labor Code section 2751, contact Mark Kruthers in Dowling Aaron Incorporated’s Fresno office at (559) 432-4500.