What is a Commission? « Law Offices of Timothy Bowles | Top Employment Law Firm in Los Angeles

What is a Commission?

Definition is Particularly Important for California Employers,
All Commission Wage Agreements Must Be in Writing by 2013

Effective January 1, 2013, California Labor Code 2751 directs that any employment contract that includes commission compensation must be in writing, setting forth “the method by which the commissions shall be computed and paid.”  See, Employee Commissions, California Requires Written Agreements by End of 2012.

Yet,  paying an employee a percentage of the income he or she generates by his/her production does not necessarily mean the arrangement will fit California’s particular definition for a commission (and thus the upcoming “must be in writing” requirement):

“Commission wages are compensation paid to any person for services rendered in the sale of [an] employer’s property or services and based proportionately upon the amount or value thereof.”  Labor Code 204.1 (emphasis supplied).

A compensation method must meet two requirements before it is considered to constitute such “commission wages” in California:

1.     The employees must be involved principally in selling a product or service, not making the product or rendering the service; and

2.     The amount of employee compensation must be a percent of the price of the product or service.

California appeals court application of the “sales only” portion of this definition has thus found that paying auto mechanics a percentage of the hourly rate charged to customers for repairs did not constitute a commission wage.  Mechanics don’t sell cars, they only fix them.  Keyes  Motors, Inc. v. Division of Labor Standards Enforcement (1987) 197 California Appellate Reports, third series (Cal.App.3d) 557, 564

On the second, “percent of the price” portion of the definition, another California appeals court found a payment plan based on a point system related to the number of subscriptions employees sold did not constitute “commission wages.” The court found there was no showing that the points were tied to any particular price of the subscriptions sold and were instead determined by winning sales contests, selling certain types of subscriptions and other factors. Harris v. Investor’s Business Daily, Inc. (2006) 138 Cal.App.4th 28, 41

Another more recent decision further clarifies (and expands) the boundaries of the “commission wages” definition.  In Muldrow et al. v. Surrex Solutions Corporation (August 29, 2012) 202 Cal.App.4th 1232, the subject employees recruited “candidates” for employer “clients.”  Surrex’s clients would place “job orders” with Surrex and appellants would search for potential candidates to fill the job orders.  The employees would use various resources to find candidates, including an internal database that Surrex maintained and various “on-line job boards.” Appellants would then attempt to convince both the candidate and the client that the placement of the candidate with the client was a proper fit.

While the Surrex employees’ written contracts specified “sales” was only one of several responsibilities (also including account development and management), the court found the job amounted to sales and sales-related activity.  Moreover, Surrex obtained revenue from a client only in the event of a successful placement from which the employee instrumental in the transaction received a percentage commission equal to: a) the percentage of the placement fee (for candidates hired directly by employer clients); or b) the percentage of  the profits Surrex received  (for candidates Surrex placed as independent consultants and billed to the client at an hourly rate).

The employees, who had a stake in excluding the Surrex “percentage of profits” plan from the above definition (it would have meant they could collect overtime pay) argued that only a payments calculated from a straight percentage of the price of the service of product sold should constitute “commission wages.”  The appeals court disagreed, finding that Surrex’s profit-tied commissions were sufficiently related to the price of the services sold to fall within that definition.

Any percentage compensation agreement that falls outside of the definition (such as those for mechanics and publications sales above) will be excluded from Labor Code 2751’s upcoming “must be in writing” requirement.  With this new law approaching, there is no better time for California employers paying employees on a percentage basis to review their compensation structures to confirm whether such arrangements must be in writing and, regardless, whether the computation methods are clearly articulated and consistently applied.  Contact an experienced employment law attorney for assistance.