Many California employers compensate employees engaged in sales activities in whole or in part with commissions. California law has specific requirements about the timing of payment of such commissions, the identification of such commission payments on wage statements, and the payment of minimum wages and overtime wages to employees in addition to such commission pay.
Under California law, commissions are considered "wages" within the meaning of California Labor Code section 200. See Nein v. Hostpro, 174 Cal. App. 4th 833 (2009).
Examples Of Commission Plans
Employers use various types of commission plans to compensate their employees, including the following:
- Employee receives a percentage on each dollar of sales
- Employees receives a base salary plus a commission on all sales
- Employee receives a "quota bonus" involving a base salary plus a commission on sales in excess of a predetermined sales quota
- Employee receives a fixed "advance," "guarantee," or "draw" on a weekly, biweekly, semi-monthly, of monthly basis, and receives supplemental sums at periodic intervals equal to the difference between the amounts already paid and the amount of commissions earned
Exemption From Overtime Wages
Under Federal and California law, there are limited circumstances where employees who are compensated in whole or in part with commissions may be exempt from state and federal overtime requirements, i.e. exempt from receiving overtime wages. The relevant exemptions that generally may apply are: (1) Outside Salesperson Exemption, and (2) Inside Salesperson Exemption.
Outside Salesperson Exemption
Federal Outside Salesperson Exemption: A commission employee may qualify as an exempt outside salesperson if:
- The employee's primary duty is making sales within the meaning of the Fair Labor Standards Act, or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client of customer, and
- The employee must be customarily and regularly engaged away from the employer's place or places of business in performing such primary duty.
California Outside Salesperson Exemption: The California Industrial Welfare Commission's Wage Orders defines an exempt "Outside Salesperson" as any person 18 years of age or older "who customarily and regularly works more than half the working time away from the employer's place and business selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities. See Ramirez v. Yosemite Water Co., Inc., 20 Cal. 4th 785, 789 (1999).
Inside Salesperson Exemption
Federal Inside Salesperson Exemption: A commission employee working in a retail or service establishment may qualify as an exempt inside salesperson if:
- The employee's regular rate of compensation is greater than one and one-half times the minimum wage rate, and
- More than half the employee's compensation for a representative period of at least one month consists of commissions on goods or services.
California Commission Employee Exemption: A commission employee may qualify as an exempt employee if:
- The employee's earnings exceed one and on-half times the minimum wages, and
- More than half of the employee's compensation must represent commissions.
The California and Federal standards for the Inside Salesperson exemption are substantively different in important respects. For example, because California's minimum wage is higher than the federal minimum wage, an exempt employee's compensation must be higher to meet the California standard for the exception. Also, under the California standard, an employer may not attribute commission wages paid in one pay period to other pay periods (including a pay period in which the commission was earned) to satisfy the compensation requirement of the California exemption. Peabody v. Time Warner Cable, Inc., 59 Cal. 4th 662 (2014).
Calculation Of Regular Rate Of Pay
When an employer calculates an employee's regular rate of pay for purposes of overtime calculation, commissions must be calculated into the formula. Because such commissions are earned during straight time and overtime hours, an employee’s regular rate is calculated by dividing the total commissions for the workweek by the number of hours that the employee worked in the workweek. The employee will be entitled to one-half his or her regular rate for each overtime hour worked.
Employers often pay their employees commission bonuses but fail to include these commission when calculating the amount of overtime wages due to the employee. In such cases, the employer may be paying the employee less overtime wages than the employee actually earned.
Contact Sani Law Today
We will aggressively pursue compensation from employers that fail to follow the law. If you have been incorrectly classified as an exempt employee, or if you have been denied your earned commissions, or if your commissions have not been taken into account in your overtime wages, Contact Sani Law today to schedule a free initial consultation.