Is Your Commission Plan Compliant?

“I provide commissions to several employees for selling or upselling certain products. Some sales result in a flat $50 commission, while others are a percentage of my profit.”

Your HR Survival Tips

California employers have been required to provide written commission plans since 2013. However, we still see many companies that either have a plan that is non-compliant or just don’t understand California’s definition of commissions. Let’s deal first with the definition: (a) the employee must be directly involved in making the sale and (b) the commission must be a percentage of the sale.

As you can see, the definition did not include a flat fee option. If you are paying a specific dollar amount, it’s legally considered a bonus rather than a commission. Commissions are NOT (a) short-term productivity bonuses such as those paid to retail clerks or (b) bonus and profit-sharing plans… unless you offered to pay a fixed percentage of sales or profits as compensation for work.

You may need more than one commission plan to accommodate the various types of commissioned employees you have. However, the template will be very similar because your commission plan(s):

  • Must be provided in writing to each commissioned employee — Tip: Put the employee’s name as the Participant early in the document so it’s easy to see you’re using the correct plan.
  • Must explain the method(s) used to compute the commission amount — Tip: No one wants to read a large spreadsheet… keep it as simple as you can but make sure it covers everything. The Labor Commissioner’s Office wants the employee to be able to easily calculate their own commission each period. It should not be based on net profits because the employee (and judges) don’t know how to calculate that amount. Instead, “10% of the gross sale” is very easy to calculate and you could lower the percentage if needed to cover your other expenses.
  • Must state the condition(s) that need to be satisfied for a commission to be earned, including the timing of each condition — Tip: Think about what exactly defines the very moment when you are willing to pay a commission. If that moment occurs, you will owe the commission and not be able to get it back. Many companies want to receive payment in full before they are willing to consider the sale complete.
  • Must discuss deductions for commission advances — Tip: Never use the word “draw” if you are paying any part of the commission in advance of it being fully earned. The courts have stated “draw” does not give you the right to get that payment back but will accept the use of “advances” so choose your language carefully.
  • Must clarify the status of commissions upon the termination of employment — Tip: This is the number one problem with most agreements and why they end up in front of the Labor Commissioner’s Office. Define when the employee is no longer earning any portion of the commissions and be fair about it.
  • Must state when and how the commission will be paid — Tip: Pay the commission within a reasonable time. It’s not unusual for October’s commissions to be paid out with the mid- to late-November payroll, depending on your sales process and calculations needed.
  • Must include anything else needed to ensure your plan is understood — Tip: Add definitions to terms and jargon used within your plan… remember that a judge won’t understand your industry’s terms, acronyms, or catchphrases.
  • Must be acknowledged as received by the employee by providing a signed receipt — Tip: If you’re concerned about lawsuits, consider adding a place on each page for the employee to initial, plus signing the receipt.

Remember that this agreement remains in effect legally for as long as the employee continues to work for you… or until it is replaced and superseded by a new agreement. It will not automatically expire, it must be replaced or voided. Give employees plenty of notice when notifying them of a new plan.

The law doesn’t yet have any penalties for not complying with this law. This is most likely because noncompliance leaves you strangely open to a variety of employee lawsuits. We think the government feels the threat of employee lawsuits may carry more weight toward compliance than a fine.

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