Commissions, like bonuses, are a form of incentive compensation. Incentive compensation is money paid to an employee, in addition to the employee’s salary or wage, to encourage increased performance from the employee or to retain the employee’s services for a longer period of time.
What are commissions?
Commissions are a form of employee wages and are legally defined as “compensation paid to any person for services rendered in the sale of [an] employer’s property or services and based proportionately upon the amount or value thereof.” (Cal. Lab. Code § 204.1.) In plain English, commissions are money, stock options, or other forms of compensation issued to an employee for having met predetermined performance standards, such as the sale of the employer’s products. The predetermined performance standards are determined in advance on a contractual basis, meaning that the actual benchmarks that must be satisfied by the employee to earn the commission will vary on a case-by-case basis.
Any contract to pay commissions must be in writing. (Cal. Lab. Code § 2751.) This contract, called a Commission’s Agreement, must describe how any commissions are calculated, when the commissions must be paid, and what benchmarks (called “conditions precedent”) the employee must satisfy in order to earn the commission.
Commission’s Agreements can take a number of different forms. Most frequently, the employee will receive a fixed percentage on every dollar of sales made, or in the alternative, the employee may receive a fixed percentage of sales made after reaching a predetermined quota of goods sold (i.e. five percent of all products sold or 10% after $150,000.00 of goods have been sold.)
What happens to an employee’s right to receive commissions if they are fired?
Many employers require an employee to be currently employed in order to receive a commissions payment. This is highly problematic for the employee who performs most of the expected legwork to generate a commission, but is then abruptly terminated just prior to finalizing the underlying sale, thereby depriving the employee their commission.
The law on this particular subject is very complicated. However, a terminated employee’s right to collect a commission for work performed depends on a number of factors, including: 1) The language of the underlying written Commission’s Agreement between the employer and employee; 2) Whether the employee was terminated in violation of the California Fair Employment and Housing Act or other public policy; 3) Whether the employee was terminated for good cause, malfeasance, or theft; and 4) Whether the employer committed fraud against the employee to evade paying the employee their commission. Employees who have been terminated in violation of the California Fair Employment and Housing Act or other public policy stand a much greater chance of being able to collect their unpaid commissions than employees who have simply been terminated for actual or perceived poor performance.
How can employees collect an unpaid bonus or commission?
Once a commission or bonus is earned by the employee, it essentially becomes the employee’s property. Legally, the non-payment of an earned commission is viewed no differently than the non-payment of the employee’s wages or salary. An employee can use a variety of legal procedures to collect any unpaid commission or bonus, including a civil lawsuit, to collect their unpaid wages. If an employee prevails in a civil lawsuit against their employer to collect their unpaid commission, the employee may also be entitled ten-percent interest, court costs, the employee’s reasonable attorney’s fees, waiting time penalties, and penalties under the Labor Code Private Attorney General Act (“PAGA”.) In many instances, the penalties and attorney’s fees associated with an unpaid commission or bonus will exceed or be many times larger than the unpaid commission itself. This incentivizes aggrieved employees to vigorously enforce their rights and pursue unpaid commissions.
Are you owed any unpaid commissions or bonuses? Contact the Law Office of Brian Mathias today.