As a general rule, employers may not take away or reduce any commissions that an employee has already earned. There are often terms in the commission agreement that allows an employer to deduct commission in certain situations. Those situations, however, are limited by state commission-based pay law and must be clearly written in the commission agreement.
In most cases, an employer is allowed to reduce a worker’s commission rate. But the employer must give notice of the rate change, and apply it
- prospectively towards future commissions, rather than
- retroactively to commissions already earned.
When is an employer allowed to take away commission payments?
The general rule is that employers cannot take away wage payments.1 This includes sales commissions.2
However, employers can carve out exceptions to this rule in the commission agreement, which is an employment contract. These exceptions in the employment agreement have to be tied to the employee’s sales, rather than general business expenses, and the employee has to agree to them in the contract.3
Sometimes, those exceptions can be quite large.
Common sales commission deductions that are included in a commission agreement can be for:
- reductions in commission for selling products at a discount,
- loss of commission if the product is returned or the payment is refunded,
- offsets in future commission payments in exchange for advance payments before payday,
- damage caused by the worker’s deliberate, dishonest, or grossly negligent act,4
- legal wage garnishments, or
- payroll tax deductions.
These exceptions, however, have to be clearly written in the commission agreement.5 Most states require the employee’s commission rates to be in
- a written contract, not
- an oral one.
When are employers not allowed to take them away?
The exceptions that the employer can make, however, are not limitless. State employment laws forbid employers from taking back the payment of commissions in certain circumstances, such as:
- cash shortages,
- loss of equipment or broken products,
- business losses resulting from the employee’s simple negligence, or
- general business expenses.6
These deductions are not allowed, even if the employer included them in a written agreement concerning commissions and the employee signed it.7
In any case, employers are not allowed to take away commission payments when it would violate minimum wage laws.
What about the minimum wage?
American workers who are covered by the federal Fair Labor Standards Act (FLSA) or their state’s equivalent are entitled to earn at least the minimum wage. The federal minimum wage in 2020 is $7.25. Many state labor laws provide for higher minimum wages. Many states are also in the process of increasing their minimum wages by amending their wage and hour laws.
California, for example, will have a $15.50 hourly minimum wage in 2023.
What is a sales commission?
A commission is a payment that an employee earns for completing a specific task. Employers can pay their workers a sales commission when the employee completes a sale on the employer’s behalf.
Sales commissions are often a percentage of a sale or a contract. This makes them a common incentive that employers use to drive sales.
The pay of some positions, like the job of an outside salesperson or sales representative, is solely on a commission basis. Others pay a salary, plus a bonus for earned commissions.
Many states define commission as a form of wages. California is one of them.8 This provides additional legal protections for workers making a commission in a given pay period.
What if I was fired?
State employment law determines when, or whether, commissioned employees can receive unpaid commissions after they have been fired or terminated.
In California, commissions are classified as wages, and all wages generally must be paid on the employee’s final day on the job.9
In many cases, however, the commission calculation takes time. This is especially common when commission is calculated based on “final” sales, and sales do not become final until the return period has expired. In these circumstances, the employer has to pay the earned commission in a reasonable time frame.
What can I do to recover commission payments that were taken from me?
If an employer takes back commission payments in violation of the law or the commission agreement, it can amount to
- a labor violation or
- a breach of contract.
Employees would do well to go to a law firm and speak with an employment attorney. Many states, including California, take wage and hour violations like these particularly seriously. If there was also a violation of the FLSA, the U.S. Department of Labor might get involved.
Victimized employees are often able to recover:
- the commission and back pay that they had earned,
- attorneys’ fees and court costs, and
- penalties and liquidated damages, which can double the back pay.
- See California Labor Code 221.
- See California Labor Code 200(a).
- Marr v. Bank of America, NA, 506 F. App’x 661 (9th Cir. 2013).
- Cal. Code Regs. tit. 8 11070(8).
- See Steinhebel v. Los Angeles Times Communications, 126 Cal.App.4th 696 (Cal. Ct. App. 2005).
- See Sciborski v. Pacific Bell Directory, 205 Cal. App. 4th 1152 (Cal. Ct. App. 2012).
- Hudgins v. Neiman Marcus Group, Inc., 34 Cal. App. 4th 1109 (Cal. Ct. App. 1995).
- California Labor Code 200(a).
- California Labor Code 201 and 227.3.