California law regarding commission payments to employees can be complex. Many of the rules come from the terms of the commission agreement between employer and employee, but state law also regulates those agreements. The terms of the commission payment agreement must be in writing and explain how commissions are calculated. The commission contract should be signed by the employer, with a signed receipt from the employee.
The commission plan typically determines when an employee’s commission is considered “earned,” which is usually tied to when the sale is finalized, product is delivered, or payment from the customer is made. Once the employee has fulfilled the conditions required by the employer, the commission is a wage and the employer is legally obligated to pay it the same as any other wage.
Commissions Must Be Paid When They Can be Calculated
Commission must be paid within the time otherwise set by California law. That is, the employer cannot wait until whenever it is convenient to pay commissions. Once the commission is “earned” under the employer’s policies and it can be calculated for a certain pay period, the commission usually must be paid on the pay check for that pay period, with any other wages earned in that timeframe.
No Backward-Looking Changes to Commissions
While a California employer can normally change a commission plan going forward (as long as it pays at least minimum wage and follows other baseline protections), retroactive changes are not allowed. That is, if an employee has performed all duties to “earn” a commission under a commission plan, the employer cannot then change the plan to pay less for those sales (for example through lower rates or higher sales targets that are applied to previous sales).
Overtime for Commission Employees
Employees earning commissions are often classified as “exempt” and not entitled to overtime. Sometimes this classification is correct, but often these employees are “misclassified” and should be paid time-and-half or double time for certain hours. The most common “commission exemption” applies in some, but not all, industries. It takes away an employee’s right to overtime, but only if the employer can show both that the employee (1) earns at least half of his/her income from commissions, and (2) spends more than half (50%) of his/her work time actually making sales and earning commission. So if the employee receives more than half or his/her pay from hourly work or spends more time servicing customers than making sales, that employee may have been misclassified and the right to collect back overtime.