sales compensation in california: how to draft effective, legally sound sales commission agreements...

Sales Compensation in California: How To Draft

Effective, Legally Sound Sales Commission Agreements

Tuesday, January 25, 2011Presented by the Employer Resource Institute

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About Our Speakers

Allen M. Kato, Esq., is an attorney in the San Francisco office of law firm Fenwick & West, LLP. His practice concentrates exclusively on representing management in wage and hour, equal employment opportunity, unfair competition and trade secret matters, and privacy matters; and litigating individual and class action wage and hour, wrongful discharge, employment discrimination, and unfair competition matters before courts and agencies. He also trains managers and HR professionals on a regular basis.


About Our SpeakersSaundra L. Riley, Esq. is an attorney in the Mountain View office of Fenwick & West, LLP. In her employment litigation practice, Riley defends employers against claims for discrimination, harassment, and retaliation; wage and hour and California Labor Code violations; unfair competition and trade secret violations; breach of contract; and many other claims in state and federal court. In her employment counseling practice, Riley advises employers about trade secret protection, wage and hour issues, leaves of absences, company handbooks and policies, employee performance management and terminations, and many other personnel issues. She also regularly provides training programs on various employment law topics, including harassment prevention, leaves of absence, conducting investigations, and managing within the law.

Sales Commission Agreements That Legally Hold UpHow to Draft Legally Sound Sales Commission Agreements

Presented for: Employer Resource Institute

January 25, 2011

Allen KatoSaundra Riley

OVERVIEW

What is a sales commission

When is a commission “earned”

When may an employer modify sales commission terms

How should employers treat commissions upon termination

When are sales employees exempt from overtime

“COMMISSIONS” DEFINED

California definition

Amount calculated as percentage of revenue from sale of product or services

Federal definition

Work for retail or service establishment

Receive a flat percentage on each dollar of sale

Significance of difference

Compare salary plus commission or bonus

VESTING OF COMMISSION

When is commission deemed “earned”

Employer afforded significant latitude to define conditions

–Must be clear

–Must be tied to employee’s actual job duties

–Must be done in advance, preferably in writing signed by employee

VESTING OF COMMISSION

Compare draws or advances

Reconciliation

Recoverable

Explain what is supposed to happen if a sale is canceled or the terms need to be re-negotiated

CHANGING THE VESTING EVENT

California law on plan changes following a windfall transaction

Procuring cause of sale

Covenant of good faith and fair dealing

Federal case law

REQUIREMENTS UPON TERMINATION OF EMPLOYMENT

Payment of commissions upon termination

Earned commissions payable upon termination and may not be forfeited

If not calculable at time of termination, commissions must be paid as soon as amount ascertainable

Employee terminates

Employer terminates

WHEN COURTS MAY RE-WRITE THE PARTIES’ AGREEMENT

Even if contract clear on its face and can’t be clearer

Legal doctrine of unconscionability allows court to re-write the contract

Must be procedural unconscionability

Must be substantive unconscionability

–Provision so one-sided as to “shock the conscience”

EXEMPTION FROM MINIMUM WAGE AND OVERTIME

Commission exemption

California exemption for inside sales

– Total earnings must exceed 1-1/2 times minimum wage

– More than half of employee’s compensation must be commissions


Federal commission (section 7(i)) exemption)

– Must be retail or service establishment

> 75% or more of sales of goods or services must be from sales that are not for resale (i.e., retail, not commercial)

> Sales are recognized as “retail” in industry

– Employee’s regular rate of pay must exceed 1-1/2 times minimum wage for every hour worked

– More than half of total earnings must consist of commissions


Outside sales exemption

Customarily and regularly works more than half the working time away from “employer’s place of business” selling products, services or use of facilities

“Employer’s place of business” may include employee’s residence use to make telephone calls

If not exempt, then must pay minimum wage and overtime pay

COMPUTING OVERTIME ON COMMMISSION

Computing overtime on commissions

Compute the regular rate by dividing total earnings for week (including earnings during overtime hours) by total hours worked. For each overtime hour, pay ½ regular rate for hours requiring 1-1/2 and additional full rate for hours requiring double time

Use a commission rate as the regular rate and pay 1-1/2 or double time for overtime hours

DO’S AND DON’TSAvoiding Common Mistakes and Pitfalls

Do call “commission” only compensation that is a percentage of sales

Do clearly state the terms and conditions for earning

Do clearly state the terms and conditions for a draw or advance

Do not take away a vested commission


Do consider and lawfully implement a windfall provision

Do pay all commissions earned upon termination

Do have a job description that defines the salesperson’s duties

Do ensure that an inside salesperson’s commissions exceed 50% of wages for each workweek


Do ensure that an outside salesperson works over half the time away from the employer’s place of business

Do properly compute overtime on all wages, including sales commissions

QUESTIONS?

THANK YOU!

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