Commission Only Pay for Sales Employees in California

Commission only pay refers to how some California sales employees are paid for their work and/or services. In this arrangement, you earn a commission, or an amount of money, when you sell something. This amount is determined by either the quantity of items you sell, or the value of the item sold. Note that this pay arrangement is only available for sales employees.

As a general rule, California law requires that commissions be paid at least two times per month. Also, workers are generally entitled to unpaid commissions upon the termination of employment.

Working on a commission is one alternative to other forms of employee compensation. Some other forms include

• getting paid per hour at the minimum hourly wage,
• receiving a salary,
• earning compensation via a combination of a salary and hours, or
• receiving a regular rate of pay.

The commission agreement is a document that sets forth the specific terms of a commission-only pay arrangement. Some of these terms may include:

• how a commission is calculated,
• when the employer must pay a commission by, and/or
• the time when a commission becomes earned.

Note that some sales employees can earn commissions and still get paid:

• at minimum wage for the total number of hours worked,
• overtime pay, and
• for meal and rest breaks.

This is true unless the employee is considered “exempt.” Exempt employees are workers to whom important California labor laws, such as minimum wage laws and overtime hours laws, do not apply.

An example of an exempt employee is an “outside salesperson.” This is a salesperson who:

• regularly works more than half his/her working time away from the employer’s place of business, and
• sells items or obtains orders for products or services.

Commissioned inside salespeople are exempted as long as:

1. they earn more than 1.5 times the minimum wage, and
2. more than half of the employee’s compensation are commission earnings.

Non-exempt employees, though, are entitled to the above benefits. The failure to provide them is a violation of the Fair Labor Standards Act (FLSA). This is the federal law that establishes the federal minimum wage rules, overtime pay laws, and other regulations affecting workers.

Our California labor and employment attorneys will highlight the following in this article:

• 1. What does it mean to be paid on a commission basis?
• 2. What is the commission agreement and why is it important?
• 3. What is an earned sales commission?
• 4. Are commissioned employees also paid a minimum wage and overtime pay?
• 5. What about payment for rest breaks?

1. What does it mean to be paid on a commission basis?

Commission only pay refers to how some California sales employees are paid for their work and services.

A commission is simply an amount of money a person earns when he/she sells something. Therefore, in a commission pay arrangement, a sales employee’s overall salary or compensation will depend on either:

• the amount of goods sold, or
• the value of an item sold.¹

The decision as to whether an employee is paid per the amount of an item sold or the value of the item is determined by the employee and the employer.

Example: Mark works for a Los Angeles used car dealership and his salary is determined by a commission only pay basis. Mark and the dealership agree that the dealership will pay Mark $150 for every car he sells. This amount represents the commission sales that Mark earns per vehicle. If he sells four vehicles in a day, he will earn a total amount of $600. Therefore, Mark’s overall minimum salary is determined by how many cars he sells in a given pay period.

Note that Mark and the dealership could have agreed that Mark would get paid, not per vehicle sold, but by the amount that the vehicle was sold for. In this arrangement, Mark would get paid a certain percentage of the sales price that he sold a car for. If this percentage was 10 percent, and he sold a car for $5,000, then the dealership would have to pay him $500 (which is 10 percent of $5,000).

Note that only “sales employees” earn commissions. A worker not involved in selling items does not earn a commission.²

An employee “sells” something when he/she trades or exchanges an item or service for:

• money, or
• something else that has value.³

Also note that in a true commission only pay arrangement, a worker’s compensation depends only on commission and not:

• an hourly pay or an hourly wage,
• an hourly rate applied across a total number of hours worked in a workweek,
• on a salary basis, or
• on a regular rate of pay.

2. What is the commission agreement and why is it important?

The commission agreement is a document that sets forth the specific terms of a commission only pay arrangement.

The agreement is generally part of an employee’s employment contract.⁴

In the agreement, both the employer and employee decide on the details concerning commissions and the conditions of employment. These details may include:

• how commissions are calculated,
• when commissions are earned,
• the employee’s primary duty in terms of selling,
• if a commission is paid upon the completion of a task, and/or
• if the employee is to conduct sales at the employer’s place of business, a certain service establishment, or some other location.

3. What is an earned sales commission?

California State law says that employers must pay employees sales commissions when the commissions have been earned.⁵

The commission agreement normally sets forth the conditions and details on when a commission gets earned.

An agreement, for example, may say that a commission is earned when:

• a customer signs a sales agreement to buy a good or service,
• a customer pays money for the good or service, or
• some other conditions.

Note, though, that once the conditions get met, the law says the employer has to pay the employee, just as it would have to with wages.⁶

4. Are commissioned employees also paid a minimum wage and overtime pay?

Most sales employees that get paid on commission may also get paid minimum wage for the total number of hours they work.⁷

This is true unless the employee is “exempt.” Exempt employees are workers to whom California’s wage and hour laws do not apply.

An example of an exempt employee is “outside salespersons.” The “sales exemption” is the California employment law that says an employer’s “outside salespeople” are exempt from receiving minimum wage and overtime pay.

Non-exempt employees, however, are protected by California wage and hour laws. An employer’s failure to provide them is a violation of the FLSA.

Note also that most non-exempt commissioned workers can get paid for overtime work. Overtime pay is allowed if an employee works more than:

• eight hours in one day,
• 40 hours in a week, or
• six straight days in the same workweek.

5. What about payment for rest breaks?

California employers normally must give their employees meal breaks and rest time.

Again, this is true unless an employee is considered exempt.

For sales employees that are paid only on commission, employers must also pay them for the time they spend on their rest breaks.⁸ This pay is separate and in addition to the payment of any commissions.⁹

For additional help…

For additional guidance or to discuss your case with a labor and employment lawyer, we invite you to contact our law firm at Shouse Law Group. We provide free consultations and legal advice that you can trust.

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