Commission pay is a common form of an employee’s compensation in exchange for sales and performance-driven roles. Commissioned employees’ pay structure is governed by various guidelines, including state and federal law, to ensure fairness and transparency. There can be certain rules in place for commissioned employees’ ability to receive overtime pay, overtime compensation, minimum wage requirements, pay period stipulations, final wages, and an employee’s total earnings.
Written Agreement
- Requirement: California law mandates that commission pay agreements must be in writing. The agreement should clearly outline how commissions are calculated, the payment schedule, and any conditions that must be met by sales employees to earn and receive the commission.
- Sometimes, it is worth hiring employment lawyers to look over the agreement to ensure it complies with minimum wage laws, for example, to ensure the employee is being protected.
Calculating Commissions
- Clear Definition: The agreement must specify the basis for calculating the commission. A company might pay employees who work on commission by a percentage of sales, profits, or other measurable data. It should also define when a commission is earned (for example: upon the time of the sale, delivery, or payment by the customer) .
- Deductions and Adjustments: Any potential deductions or adjustments to the commission must be explicitly stated in the agreement.
Payment Timing
- Regular Pay Schedule: Employee’s commissions must be paid according to the schedule specified in the written agreement, typically aligned with regular pay periods. If you experience a delay, or irregular payments, you may be entitled to additional compensation, like waiting time penalties.
Employment Status Changes
- Termination or Resignation: The commission agreement should address what happens to commissions if an employee is terminated or resigns. In many cases, a commissioned employee is entitled to commissions on sales they completed while they’re employed, even if the payment occurs after their departure.
Legal Compliance
- Minimum Wage and Overtime: Commission pay must comply with state or federal minimum wage and overtime laws. This means that a sales employee must receive at least the minimum wage for all hours worked, and overtime pay must be calculated correctly based on their total earnings, including commissions.
Dispute Resolution
- Dispute Handling: The commission agreement should include a process for resolving disputes related to commission calculations or payments. This can help prevent misunderstandings and legal conflicts.
Record-Keeping
- Documentation: Employers must keep detailed records of sales, commissions earned, and payments made. This documentation is crucial for resolving any disputes and for compliance with California labor laws.
Labor Laws For Commission-Only Employees
Labor laws for commission-only employees in California are designed to ensure that workers are treated fairly and receive appropriate compensation for their work at retail establishments, or other service establishments where they are paid commission.
Minimum Wage and Overtime
- Minimum Wage: Even if employees are paid on a commission-only basis, they must still earn at least the minimum wage for all hours worked. Employers must track the hours worked by commission-only employees to ensure they meet this requirement.
- Overtime: Commission-only employees are entitled to overtime pay if they work more than 8 hours in a day, or 40 hours in a week. Overtime pay is calculated at one and a half times the employee’s regular rate of pay, which includes commissions.
Meal and Rest Breaks
- Entitlement: Commission-only employees are entitled to the same meal and rest breaks as other employees. This includes a 30-minute meal break for shifts over 5 hours and a 10-minute rest break for every 4 hours worked.
Reporting Time Pay
- Reporting Time Pay: If a commission-only employee is required to report to work but is given less than half of their usual or scheduled day’s work, they are entitled to reporting time pay. This ensures they are compensated even if they are not given sufficient work for the day.
Payment of Wages
- Timely Payment: Commissions usually must be paid at least once per month. Employers must also adhere to the regular pay periods for the payment of other wages due, such as advances or guaranteed minimums.
Termination and Resignation
- Final Pay: When a commission-only employee is terminated or resigns, they are entitled to receive any unpaid commissions that were earned prior to their departure. The timing of the final payment depends on whether the employee was terminated or resigned.
Additional Protections
- Anti-Retaliation: Employees are protected against retaliation for asserting their rights under wage and hour laws. Employers cannot punish or discriminate against employees for seeking fair compensation or reporting violations. If so, an employment attorney can help you fight back against bully bosses.
Commission Pay Guidelines – FAQ
can my employer change my pay structure without notice? Typically there are not federal protections if companies change their pay without notice. While an employer can never retroactively cut pay, they do not have to give an employee notice if they are about to cut pay unless state laws require it.
what is a drawback of jobs that pay salary plus commission? This can be subjective; while some commissioned employees may prefer their commission plan, it might not be as comfortable for other workers. Jobs that offer salary plus commission have the potential to lead to instability of the position because of unpredictable income and the pressure to meet sales targets. An increased workload and time pressure could also lead to work-life imbalance and stress.
can an employer take away commission? Employers cannot take away wage payments, which includes sales commissions. However, they can stipulate exceptions in the commission agreement, or employment contract.
can w2 employees be commission only? W-2 employees can be paid on a commission basis, but unless the employee is EXEMPT, their commission must equal at least the minimum wage for every hour they work, and 1.5 times the minimum wage if they work overtime. If their commission does not equal at least that amount, the employer must pay them enough to make up the difference.
what is a draw against commission? A draw against commission is a salary plan based totally on an employee’s earned commissions. The employee is paid an advance (typically a set amount of money) at the start of a pay period. At the end of the pay period, depending on the agreement, the draw is deducted from the employee’s commission.
can an employer withhold commission if you quit? According to the state of California, “In the event the commissions have been “earned” on or before the date of your termination, the employer must complete the necessary calculations and pay the commissions on the date of the termination in the case of a discharge or a voluntary quit with more than 72 hours prior notice.”
can an employer reduce your commission? Typically, employers may not take away, or reduce, any commissions that an employee has already earned. Sometimes the commission agreement allows an employer to deduct commission in certain situations, like the above state “draw against commission.”
