Commission & Bonus Payments
California law regarding employees’ rights to commission payments and earned bonuses can be complex.
Rights to commissions often depends on both the terms of the employer’s commission agreement or plan between employer and employee and state statutes. The employer’s commission payment agreement or plan must be in writing and explain how commissions are calculated. It should also be signed by the employer, with a signed receipt from the employee.
The commission plan typically determines when an employee’s commission is considered “earned” or “accrued,” which is typically triggered when the sale is finalized, product is delivered, or payment from the customer is made. Once the employee has fulfilled the conditions required under the plan, the commission is deemed an earned wage that the employer must pay under California law.
Whether an employee is entitled to a bonus depends on whether it is non-discretionary or discretionary. If the bonus program depends on objective criteria, like individual or group achievements (e.g., reaching set sales/production levels), or certain events (e.g., anniversary dates), then the bonus is non-discretionary. Once the achievements are met or events occur, the bonus becomes an earned wage and must be paid. However, if the employer retains the right to determine if a bonus will be paid or determine the amount of the bonus, then it is a discretionary bonus to which the employee has no rights.
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Employers in California are generally free to set the terms of their commission plans going forward, retroactive changes are not allowed. However, once an employee has performed all duties to earn a commission under a commission plan, the employer cannot change the plan to reduce or eliminate the commission. For instance, employers cannot claw back earned commissions by retroactively lowering the commission rate or increasing the target numbers for earning the commission.
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The employer cannot delay payment of commissions. Once the commission is “earned” under the employer’s policies and it can be calculated for a certain pay period, the employer typically must pay out the commission with other earned wages for that pay period.
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Employees earning commissions are often classified as “exempt” and not entitled to overtime. This classification may be lawful in some industries, but not others. Also the exemption may only apply if the employees (1) earn at least half of their income from commissions, and (2) spends more than 50%) of their worktime actually making sales and earning commission. Also, in some instances, employees who are not paid commissions every pay period may not fall within the exemption. If the employer cannot make out the legal requirements for the commission exemption, the employee must be paid time-and-half or double time for certain hours.