To forego concerns about labor overtime, overtime claims, wage claims and to insure employee performance businesses often implement creative commission structures designed to benefit the motivated employee and the employer. California overtime and compensation laws are generally very protective of workers and the legal system for the most part protects workers against creative commission schemes.
In one such creative commission structure the employer attempted to circumvent the law by not paying commissions after the employee left, even if the commission was really earned by the former employee. In an environment of high employee turnover, which is often the case with sales persons, such a plan made perfect sense for the employer. Fortunately for the employer the plan was turned down by the California Division of Labor Standards Enforcement and the employer did not have to worry about future wage claims.
The employer sought an opinion letter before proceeding with the plan. In the plan it described a compensation system that included quarterly payouts of commissions on sales. The program also required current employment at the time of the quarterly commission payout. If the employee was not working at the time of the quarterly payment then no payment was due.
The Division of Labor Standard Enforcement advised that commissions on sales are waged calculated and owed upon the completion of the sale and must be paid in accordance with California Labor Law. Under California law wages earned are due and must be paid twice during each month on days designated in advance by the employer. Such a plan was deemed to be unacceptable as it was not compliant with existing law. Even if the plan did not provide for forfeiture of commissions it would still not be compliant, because it did not provide for payment of wages twice a week.
A labor attorney knowledgeable about labor laws is often very instrumental in helping a business stay out of trouble. A labor attorney is likewise very instrumental in helping an employee with wages and overtime lawsuits.
In this such case it was fortunate the employer was advised to seek such an opinion before attempting to implement the plan. Otherwise a workers attorney would eventually have picked up as a good wage claim to litigate.
In the opinion issued there was a reference to case where it was determined to not pay commissions where the orders were cancelled. That case was distinguished on the grounds that it was not unreasonable because of the period of time and the fact that no sale had actually occurred if there was a cancellation. The DLSE further added that this plan did not provide for a salary to be drawn against future commissions. The DSLE opinion letter stated that it is sometimes permissible to require that the contract upon which the commissions are based is not complete until payment of the contract price to the employer.
The DLSE conclude by summarizing as follows:
To summarize then, we would first point out that commissions earned on a sale must be paid within the pay period pursuant to the provisions of Labor Code Section 204. Withholding payment of earned commissions until the end of a three-month period would be a violation of California's Labor Code. Additionally, any earned commissions may not be forfeited. As pointed out above, reasonable conditions may be placed on the vesting of the commissions; but once vested, the commissions may not be forfeited as a result of the fact that the employee terminates the employment. We might also point out that common law contract doctrines (prevention) would prevent an employer from forfeiting commissions which would have been earned by discharging the employee before those commissions vest.
Generally speaking if there is some sort of unfairness to the compensation plan it will eventually result a workers attorney filing an overtime claim or some sort of labor law attorney filing a wage claim or labor law violation claim. The sure way to invited a workers attorney to file a claim for unpaid wages is to implement an inherently unfair compensation plan.
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