A commission is an agreement, between an employer and employee, basing the employee’s compensation on a certain percentage of goods or services sold by the employee. The compensation is either a percentage of the price or product sold, or a flat amount per unit sold.
The commission agreement will determine how commissions are calculated and when they are earned by the employee. It will also typically state when the commission is to be paid. Employers may not deduct from an employee’s earned commission to account for the employee’s negligence or mistake, but an employer may “charge back” an excess commission payment made to the employee because the commission was never earned, such as when the conditions of sale are not satisfied by the customer. Otherwise, an employer may not withhold any part of the employee’s wages, except in limited circumstances defined by law.
Commission agreements must be in writing. Labor Code section 2751 provides that when “an employer enters into a contract of employment with an employee for services to be rendered within this state” and “the contemplated method of payment of the employee involves commissions”, the agreement must be in writing and set forth the “method by which the commissions shall be computed and paid.” The employer must provide the employee with a copy of the agreement signed by the parties.
Earned commissions, like other wages, are due promptly upon the employee’s termination or resignation. If the only condition remaining on a sale is payment by the customer, then the employee may still be entitled to receive payment of the commission, unless the employer has ongoing obligations to the customer. In some cases an employee who is terminated before a commission is earned may be entitled to payment of a pro-rata share of the commission.
An employer who fails to pay commissions may be liable for nonpayment of wages and breach of contract. This amount is recoverable under the California Labor Code, California Business & Professions Code, and pursuant to a claim for breach of contract. If an employee prevails in an action to recover unpaid wages, then the employer may also be liable to pay the employee’s reasonable attorney’s fees, costs, and waiting time penalties.