©2023 Seyfarth Shaw LLP www.seyfarth.com 2023 Cal-Peculiarities | 243 7.15.2 When are commissions earned? Commissions generally are earned upon the completion of a sale and any post-sale contingencies set forth in the commission plan.375 The DLSE recognizes that employers may set reasonable conditions that must occur before a commission is considered “earned.” One opinion letter states: “Commissions are due and payable after the reasonable conditions precedent of the employment agreement have been met. If commissions cannot be calculated until after an event has happened then the commissions are not ‘earned’ within the meaning of [Labor Code] Section 204 until the happening of that event so long as the event is reasonably tied to the calculation.”376 The Court of Appeal has stated that preconditions to earning the commission must be “clearly expressed,” must “relate to the sale,” and “cannot merely serve as a basis to shift the employer’s cost of doing business to the employee.”377 7.15.3 Advances and chargebacks Employers may advance commissions on a sale and then charge back the advance if the sale does not go through.378 Thus, if the employer advances an employee a commission for selling a magazine subscription, then the advance can be “charged back” against future commissions (cancelling out commissions generated in future sales) if the purchaser cancels the subscription within one month.379 The employer’s position is strongest if the earning criteria in the plan are clear, the employee has authorized the chargeback arrangement in writing, and the arrangement ensures that the employee will always be paid the applicable minimum wage.380 Advances paid against commissions to be earned may be recovered at termination of employment only if there is a specific written agreement to that effect and, for nonexempt employees, only to the extent that the recovery does not invade the minimum wage or any overtime premium pay. The Court of Appeal struck down a chargeback arrangement in Hudgins v. Neiman Marcus. In that case, a retailer addressed the problem of rescinded sales in certain sections of the store by imposing on all sales commissions in each section a pro rata deduction for “unidentified returns” (items returned that could not be tracked to a particular sales associate). Neiman Marcus concluded that this unidentified-returns policy effected a “forfeiture of commissions individually earned,” on the rationale that “[a]s to those items of merchandise the customer decides to keep, the sales associate has clearly earned his or her commission at the moment that the sales documents are completed and the customer takes possession of the purchased items.”381 Neiman Marcus concluded that the policy was unlawful under California law because the policy effectively required sales associates to “repay a portion of commissions” on “completed sales” to compensate the employer for commissions paid on sales that other employees did not complete—amounts that would otherwise be a business loss that “the conscientious sales associate has done nothing to cause.”382 Neiman Marcus contrasted this unlawful practice with a lawful practice that “identified returns, [where] the sale is reversed and the individual sales associate is required to return the commission because his or her sale was rescinded.”383 While Neiman Marcus did not decide whether an “identified returns” policy would necessarily be lawful, the DLSE has interpreted Neiman Marcus as allowing a chargeback of commissions paid to an employee for identified returns.384 7.15.4 Written contracts required for commission agreements Employers contracting for services within California and contemplating payment in the form of commissions must put the commission agreement in writing and describe how commissions are computed and paid.385 Further, employers must give a signed copy of that agreement to each commissioned employee, and obtain a signed receipt from the employee.386
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