Sales Commission Agreements

As with just about anything in CA, there are rules to live by with regards to Sales Commission and Sales Compensation plans. Although the law detailed in Labor Code Section 2751 has been on the books since January 1, 2013, law updates and legal challenges have further defined sales commission regulations and made it no less complicated to comply with.

If your company pays commissions to employees for providing services, the law requires you to have written contracts setting forth how the commission amounts will be calculated and how and when the commissions are paid. Additionally, your employee must be provided an executed copy of the contract. The employer must maintain a signed copy of the employee acknowledging receipt of the contract.

Sales Commission Definition

Generally, sales commission involves payment to an employee which includes a proportional amount of sales of your company’s products or services, and where that the employee is principally involved in the sale. Commissions should not be confused with bonuses, performance or incentive pay, or piece work plans where employees receive a portion of a job or project where they perform some or all the work.

Common Commission Pay Structures

Let's first talk about the way commissioned salespeople are typically compensated. All three examples below require a written agreement as stated above.

100% Commission

Salespeople can be paid 100% commission as long as 50% of their work time is purely outside selling. If they qualify for the Outside Sales Exemption, there is no minimum pay level. You can also pay a regular minimum salary of any level you wish, as long as it not a forfeitable draw or advance.

Commission Draw or Advance

You may advance a commission against future earned commissions either by setting up a regular payment, or as sales are made. You can then settle up draws against earned commissions with a monthly or periodic reconciliation. Caution, if you pay a regular commission draw however, that is considered their regular wage and is earned, therefor you may not be able to recover paid draws should an employee leave before the full commission has been earned. Best to get some advice when setting up draw plans.

Hourly Plus Commission

You can consider a hybrid hourly rate plus commission plan but be sure you are tracking employee time and are paid no less than minimum wage. They would be considered non-exempt in this situation so be careful to pay them for every hour worked and provide rest breaks, meal breaks, and overtime pay. if for some reason you do offer advances in this situation, you are able to reduce future commissions as with the draw scenario above but be sure you do not reduce pay below minimum wage.

Written Compensation Agreements

Salespeople who earn a commission in California must have their compensation plan documented in the form of a Sales Compensation Agreement. This agreement must clearly define:

• Method in which commissions are computed and paid
• When a commission is earned and when it is paid
• What conditions must be met before it is earned and subsequently paid
• When deductions or forfeitures may be made and for what reasons

Additionally, you should clearly define goals and expectations in a Sales Compensation Agreement including differentiation between self-obtained leads, company leads, and any other specific requirements and conditions you might require for a Salesperson to be considered successful at your workplace. Agreements should always be signed by the employee and a company official. Employee should receive a copy of the executed agreement and any future revisions.

Also, since most employees are considered “at will,” it is important to include a provision in the written sales commission agreement confirming that the employee is “at will.” It should be made clear that the employee’s at-will status is not altered because a written contract is in place.

Optimize Your Sales Force

Getting the maximum out of your salespeople involves motivation, good training and a clearly documented compensation plan where they understand their pay structure and what it takes to meet minimum standards. It is not advised to leave anything up for interpretation where you have not fully defined expectations, contingencies and ramifications if expectations are not met, lest you wind up paying out unearned commissions or worse yet, wind up in court because of disputed commissions.

Infinium HR Group has prepared a Sales Compensation Agreement Template you can download. It is meant to be used as a sample and template for you to create your own Sales Agreement. We can help you through each step of the agreement and review your final version to be sure you won’t have any issues. Please contact us at info@infiniumhr.com for any assistance.