In California, the commission agreement controls when, or even whether, an employer is required to provide earned commission pay after an employee’s termination. Many California employers use forfeiture provisions that require commissioned employees to be currently employed in order to receive their commission. If there is no forfeiture provision, employees are generally entitled to receive unpaid commissions even after leaving the job.
California courts have disagreed with each other as to whether forfeiture provisions are unconscionable.
What is a commission agreement?
A commission agreement, sometimes known as a commission plan, details how an employee’s commission payments will be calculated and paid. The agreement is often a part of the employment contract, and must be in writing whenever any part of an employee’s pay is to include commission wages. It cannot violate any labor code sections in California employment law, like those concerning minimum wage laws or overtime hours for non-exempt workers.
One of the most important aspects of a commission agreement is how it provides for commissions to be calculated. This is especially important because, according to the California Division of Labor Standards Enforcement (DLSE), a commission is not earned until it can be reasonably be calculated. Only once it can be calculated is commission earned, and only once it is earned does it have to be paid to the employee on the next payday.
Whether commission has been earned or not is especially important if the employee quits or if the employment ends.
What is a forfeiture provision?
A forfeiture provision is a common clause included in an employee’s written commission plan. It states that employees have to be currently employed to receive commission payments.
When there is a valid forfeiture provision, former employees are not entitled to receive unpaid sales commissions. Under the written agreement, they have forfeited their right to their unpaid commissions upon termination of employment.
What if there is no such provision?
If there is no forfeiture provision in the commission agreement, or if there is one but it is not enforceable in court, then the commissioned employee is entitled to receive the commission wages he or she has earned up to the time of termination of the employment relationship.
All unpaid wages are due on the employee’s last day. The commission owed to the terminated employee must be paid immediately after it can be calculated, along with his or her other final wages from their last pay period.
If this does not happen, and the employer’s failure to provide commission pay was willful and not in good faith, the employer may have to pay the employee’s wages up to when payment was due, as well as time penalties for the following month.
What does California law have to say about forfeiture provisions?
California courts have split over whether forfeiture provisions are enforceable or not. Several of the state’s appellate courts say that the provisions are binding. However, at least one other appellate court has determined that they are unconscionable and unenforceable.
The Courts of Appeals in both the First District and the Second District have decided that forfeiture provisions in commission agreements are legally binding and enforceable. Forfeiture provisions that have been signed in these areas, including in Los Angeles, are difficult to overcome in court.
However, the Court of Appeals for the Fourth District of California has ruled that forfeiture provisions are unconscionable and cannot be enforced in the district. The Fourth District covers the following counties:
- San Bernadino, and
- San Diego.
The Supreme Court of California has not yet resolved this disagreement between the state’s appellate courts.
What does it mean for a contract to be unconscionable?
A contract can be unconscionable if it is shockingly unfair to one of the parties.
There are 2 ways for an agreement to be unconscionable. It can have:
- Procedural unconscionability, where the process of forming the contract was unfair, and
- Substantive unconscionability, where the results of the contract are shockingly one-sided.
To be procedurally unconscionable under state law, an agreement can have either:
- an unequal bargaining power that leaves one party without a meaningful choice, or
- terms and conditions that are hidden from the party to be bound and that surprise them when they are enforced.
To be substantively unconscionable, the agreement has to be so one-sided that it shocks the conscience.
In California, there has to be both procedural and substantive unconscionability for a court to refuse to enforce the contract.
California courts that have found the forfeiture provisions in employment agreements to be unconscionable have focused on the following details:
- the employee did not notice the provision when they signed the contract,
- there was no indication that the employee could negotiate,
- the employee was not represented by a lawyer,
- the agreement was not presented until after the employee had moved to the area to take the job, and
- the employer had no justification for withholding the earned commission payments.
What is commission pay?
In California, commission pay is a form of wage that compensates a worker for their role in selling a product or a service. The amount of the commission is proportional to the amount of the customer’s payment.
Because an employee must be involved in a sales-related activity to earn commission wages, they are often reserved for salespeople.
The specific details about an employee’s commission earnings are laid out in the commission agreement. However, California law generally requires that commission be paid twice every calendar month. Many employers pay commission earnings from the prior pay period on the regular payday.
 See Ellis v. McKinnon Broadcasting Co., supra.
 California Labor Code 200. See also Sciborski v. Pacific Bell Directory, supra.