When sales employees receive commission payments, they are being paid under a common compensation structure, called sales commission. Usually, sales reps receive a percentage of whatever item they sell as their commission payment. However, the concept of a commission clawback – where an employer recoups previously paid commissions – can be confusing and, at times, controversial. Understanding how a commission clawback works and the legal framework governing them in California is crucial for both employers, sales teams, sales reps, and employees.
Commission Clawbacks and Employment Contracts
A commission clawback occurs when an employer demands repayment of previously paid commissions. This typically happens when an employee’s performance, or the sales transaction that generated the commission, fails to meet certain conditions stipulated by the employer. For example, an employer might take back a commission if a customer cancels or returns a product that the sales rep originally sold.
Commission clawbacks are usually outlined in employment agreements or commission plans. These agreements may detail the circumstances under which a sales’ team commission can be reclaimed and the process for doing so.
How Commission Clawbacks Work
The specifics of a commission clawback can vary widely depending on the terms of the employment contract and the sales compensation plans. Common scenarios that may trigger a sales commission clawback could include:
- Customer Returns or Cancellations: If a product is returned or a service is canceled within a certain period after the sale, the employer may claw back the commission paid for that sale. There might also be a clawback clause regarding customer satisfaction in an employment agreement.
- Performance Conditions Not Met: If an employee fails to meet specific performance criteria or if the sale does not fully close, the commission may be subject to reclamation.
- Termination of Employment: Some agreements stipulate that if an employee leaves the company, voluntarily or involuntarily, any unearned commissions can be clawed back.
Suing For Unpaid Commissions
California has specific laws that regulate commission pay and the conditions under which clawbacks are permissible. The primary legal considerations include:
1. Written Agreement Requirement
Under California Labor Code Section 2751, any commission agreement must be in writing. The agreement should clearly define the method for calculating commissions, when they are considered earned, and any conditions that might result in a clawback. Employers are required to provide employees with a signed copy of the commission agreement and obtain the employee’s acknowledgment of receipt.
This written agreement is crucial because, in the absence of a clear, written understanding, disputes over clawbacks can arise, potentially leading to legal issues.
2. California’s Wage Protection Laws
California law offers strong protections for employees’ wages, which extend to commissions. Under California Labor Code Section 221, an employer cannot collect or receive back any part of the wages (including commissions) paid to an employee or sales representative. However, this section is not absolute; it does not prohibit clawbacks that are specifically allowed under a commission agreement or where the commission was not yet “earned” under the terms of the agreement.
3. Earned vs. Unearned Commissions
An important legal distinction in California is whether a commission is considered “earned.” A commission is typically earned once the employee has performed all of the work necessary to receive the payment, as outlined in the commission agreement. Once earned, commissions are considered wages and are protected under California law.
If a commission is unearned—meaning the conditions for earning it have not been fully met—an employer may legally reclaim it, if the clawback terms are explicitly stated in the agreement. For example, if a commission is contingent upon the customer keeping the product for a certain period, the commission might not be considered earned until that period passes without a return or cancellation.
4. Timing of the Commission Clawback
Another important legal aspect is the timing of the clawback. California law mandates that wages, including commissions, must be paid promptly. Any delay in paying earned wages is a violation of California’s wage laws, which could subject the employer to penalties. If a commission clawback occurs after a commission has been earned and paid, it could be considered an illegal deduction, unless the commission agreement clearly stipulates the circumstances under which the employer can reclaim the commission.
5. Unlawful Deductions
Employers in California are prohibited from making deductions from an employee’s wages unless authorized by law, or the deduction is expressly agreed to by the employee in writing. This means that a clawback provision in a commission agreement must be clearly defined and agreed upon. If an employer attempts to reclaim a commission without proper authorization, it could be considered an unlawful deduction, leading to potential legal consequences.
Legal Disputes and Employer Best Practices
Commission clawbacks can often lead to disputes between employers and employees, particularly if the terms of the commission agreement are unclear or if the clawback is perceived as unfair. To avoid such disputes, it is essential for employees to:
- Clearly Define Terms: Ensure that commission agreements are detailed and clearly outline the conditions under which commissions are earned and when clawbacks can occur.
- Transparent Communication: Maintain open communication with employers about how commissions are calculated, when they are considered earned, and what might trigger a clawback.
- Legal Compliance: Regularly review commission agreements and practices to ensure compliance with California labor laws. Consulting with legal counsel can help employers avoid potential legal pitfalls.
Commission Pay – FAQ
can my employer change my pay structure without notice? In The California Wage Protection Act, it states that if an employer minimizes an employee’s salary or hourly pay, they must notify the employee within seven days of the changes, unless those changes are reflected on a timely wage statement or another type of written notice.
can an employer withhold commission if you quit? If a commission agreement doesn’t have a provision regarding quitting, then you are generally entitled to receive unpaid commissions even after leaving your job. However, this is a very complex case and each situation is different. It is important to consult with an employment attorney to get a better idea of what to do.
can an employer cut your pay without notice in california? Generally, yes, an employer can reduce a salary, as long as it doesn’t drop below minimum wage or violate California labor laws.
does a company have to pay you commission after you leave? Typically, under California law, your employer should pay your final commission on the day of termination. If an employer fails to pay, they may be penalized and liable for paying additional compensation.
are clawbacks legal in california? Clawback clauses are typically legal in California. However, earned wages cannot be forfeited. The definition for what is “earned” may be arguable. But, “earned” wages are not taken away if a clawback clause in effect.
can a company withhold commission if you quit? A company may withhold commission if they argue that the commission was not “earned” as stated in an employment agreement. If this has happened to you, reach out to Lawyers for Justice, PC today.
