In California, your commission agreement controls when, or even whether, an employer is required to provide earned commission pay after your termination.
Many California employers use forfeiture provisions that require you to be currently employed in order to receive your commission. Therefore if you are terminated before you receive your commission, you forfeit it.
If your commission agreement has no forfeiture provision, then you are generally entitled to receive unpaid commissions even after leaving your job.
California courts have disagreed with each other as to whether forfeiture provisions are enforceable.
What is a commission agreement?
A commission agreement – sometimes known as a commission plan – details how your commission payments will be calculated and paid.[1] The agreement is often a part of your employment contract and must be in writing whenever any part of your pay includes commission wages.[2] It cannot violate any labor code sections in California employment law, like those concerning minimum wage laws or overtime hours for non-exempt workers.[3]
Commission agreements provide that a commission is not earned until it can be “reasonably calculated.”[4] Only once it can be “reasonably calculated” is it earned. Once it is earned, the employer must pay it on your next payday.[5]
What is a forfeiture provision?
A forfeiture provision is a common clause included in your written commission plan. It states that you have to be currently employed to receive your commission payments.
When there is a valid forfeiture provision, you are not entitled to receive unpaid sales commissions following your termination. Under the written agreement, you have forfeited your right to your 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 you are entitled to receive the commission wages you earned.
If you are terminated or quit with at least 72 hours’ notice, your unpaid wages included commissions are due on your last day. If you quit with less than 72 hours’ notice, the employer has 72 hours to pay you.[6]
In some cases however, it may take additional days, weeks, or longer to “reasonably calculate” what your earned commissions are. This typically happens when either:
- Certain conditions set out in the commission agreement have not yet been met,
- The payment on the goods or services you sold is still pending, and/or
- Commission pay turns on your performance for a designated time period, such as a month or a quarter or even a year.
In these types of situations, the employer must pay you as soon as your earned commissions can be reasonably calculated.
What does California law have to say about forfeiture provisions?
California courts have split over whether forfeiture provisions are enforceable or not.
The Courts of Appeals in both the First District[8] and the Second District[9] have decided that forfeiture provisions in commission agreements are legally binding and enforceable.
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.[10] The Fourth District covers the following counties:
- Imperial,
- Inyo,
- Orange,
- Riverside,
- San Bernadino, and
- San Diego.
The Supreme Court of California has not yet resolved this disagreement between the state’s appellate courts.
What if my employer is late in paying me?
If the employer willfully fails to pay you your earned commissions following termination – and there is no good faith dispute – the employer should pay you waiting time penalties equal to your regular rate of pay for each day late, up to 30 days.
To recover your earnings, you can file wage theft claim with the California Labor Commissioner.
Note that some employers try to get out of paying overtime to commissioned workers by misclassifying them as outside salespeople rather than inside salespeople. Inside salespeople spend at least half their time at the employer’s place of business.
If you are actually an indoor salesperson and have worked more than:
- 8 hours in a workday,
- 40 hours in a workweek, or
- 6 consecutive days in a workweek,
You can also go after the employer for overtime pay, which is typically 1.5 times your regular rate of pay. It can be double if you worked more than:
- 12 hours in a workday, or
- more than 8 hours on the seventh consecutive day in a workweek.
Additional reading
For more in-depth information, refer to these scholarly articles:
- Substantive Pay Equality: Tips, Commissions, and How to Remedy the Pay Disparities They Inflict – Yale Law & Policy Review.
- Retail Workers’ Job Experiences: An Analysis of Emotional Labor, Commission Pay, and Stress – Texas State University.
- The symbolic meaning of pay contingencies – Human Resource Management Review.
- Performance pay and worker cooperation: Evidence from an artefactual field experiment – Journal of Economic Behavior & Organization.
- Creating unfairness by mandating fair procedures: the hidden hazards of a pay-for-performance plan – Human Resource Management Review.
Legal Citations:
[1] California Labor Code 2751.
[2] Same.
[3] 8 California Code of Regulations 11040(4)(B).
[4] DLSE Opinion Letter 2002.12.09-2 (December 9, 2002).
[5] See California Labor Code 204(a) and Sciborski v. Pacific Bell Directory, 205 Cal.App.4th 1152 (2012).
[6] California Labor Code 201(a).
[7] California Labor Code 203.
[8] American Software, Inc., v. Ali, 46 Cal.App.4th 1386 (1996).
[9] Nein v. HostPro, Inc., 174 Cal.App.4th 833 (2009).
[10] Ellis v. McKinnon Broadcasting Co., 18 Cal.App.4th 1796 (1993). Forfeiture provisions in employment agreements are more likely to be unconscionable if: 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. See also Wherry v. Award, Inc., 192 Cal.App.4th 1242 (2011).