Commissions Under California Labor Law

The two major questions that are frequently asked regarding commissions are 1) when are they considered earned and 2) when must they be paid.  Both are reasonable and important questions for anyone whose livelihood depends on receiving commission payments. Commissioned sales jobs are hard work, and these employees have rights under California’s wage laws to proper and timely payment of their commissions.

The short answers on these questions on California labor laws are 1) the contract between the employer and employee determines when a commission is considered earned, and 2) with very few exceptions, once earned, commissions owed to a worker must be paid at least twice during each calendar month.

When Commissions are Earned in California

Under California labor law, if any part of an employee’s pay is based on commissions, there must be an agreement in writing. The Labor Code states that:

“Whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing . . . .” and “the contract shall . . . set forth the method by which the commissions shall be computed and paid.”

Additionally, the employer must provide the employee with a copy of the commission agreement and have the employee sign a receipt acknowledging they received their copy. The Labor Code states that:

“The employer shall give a signed copy of the contract to every employee who is a party thereto and shall obtain a signed receipt for the contract from each employee.”

This may seem like a very common sense law requiring that commission agreements be put into writing and spell out how commissions will be calculated and paid, but it is not the case in most other states. So, the determination of when commissions are considered to be earned (and then legally considered wages owed) starts with the terms of the written agreement. The terms can vary depending on the industry and the employer, but the agreement should be clear and specific as to what must occur in order for the commission to be considered “earned” – thereby starting the clock on California’s timely payment of wages requirement.

When Commissions Must Be Paid in California

Regarding the payment of wages, the California Labor Code states that all wages “earned by any person in any employment are due and payable twice during each calendar month, on days designated in advance by the employer as the regular paydays.” This is the general rule for timely payment of wages under California payday law, however, there are a few exceptions – for example, commissioned auto sales employees may be paid their commissions only once each calendar month.

The California Division of Labor Standards Enforcement (DLSE) takes the position that commissions are not “earned” until the information from which they can be calculated becomes available, but once available, must then be paid during the first pay period in which the earned commission can reasonably be calculated.

There are special rules for employees who are terminated or give at least 72 hours’ notice of their resignation. While still subject to the rule that commissions are not payable until they can be reasonably calculated, such employees are entitled to be paid all earned and unpaid wages immediately.

Penalties and Remedies for Late Payment of California Commissions

California has a strong public policy to insure that workers are paid wages in full and on time. To provide a disincentive to employers who might pay workers’ wages late, California labor law provides a waiting time penalty where the employer acts willfully in failing to timely pay commissions owed. Willful in this context means intentional – with no good faith dispute about the entitlement to the unpaid wages. The waiting time penalty provides up to an additional 30 days of wages – one day for each day that payment is late. The wage rate used for calculating the waiting time penalty includes not only the employee’s base pay and commissions, but also any bonus payments and vacation pay earned in a year.

In addition to waiting time penalties, an employer who shorts workers’ wages or fails to pay on time can be subject to fines and penalties under California’s Private Attorneys General Act (“PAGA”) of $100 for each 1st violation and $200 for each failure to pay each employee, plus 25% of the amount unlawfully withheld for subsequent violations. While these penalties are paid to the state, an employee who steps up and hires a lawyer to bring these claims (on a contingent fee basis) can be awarded up to 25% of the penalties recovered, plus attorneys’ fees and costs of bringing the lawsuit.

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