Payment of commissions upon termination of employment

STATE OF CALIFORNIA GRAY DAVIS, Governor

DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT
LEGAL SECTION
45 Fremont Street, Suite 3220
San Francisco, CA 94105
(415) 975-2060

MILES E. LOCKER, Chief Counsel

January 9, 1999

Jan Gabrielson Tansil
Spaulding McCullough & Tansil
3550 Round Barn Boulevard, Suite 306
P.O. Box 1867
Santa Rosa, CA 95402

Re: Payment of Commissions Upon Termination of Employment

Dear Ms. Tansil:

This is in response to your letter, dated November 5, 1998, asking for an opinion¹ from the
Division of Labor Standards Enforcement as to when commissions must be paid to terminated
employees. Your letter states that these employees receive a small base salary, with the majority
of compensation in the form of commissions earned on retail sales under Industrial Welfare
Commission ("IWC") Wage Order 7. You state that under this employer's unwritten policy,
commissions are calculated monthly, a few days after the close of the "commission month", and
that each current employee is paid his or her monthly commission earnings in two equal payments,
with half paid on the 15th of the month and the remaining half paid on the first day of the
following month. With respect to employees whose termination occurs at the end of the "commission
month", you ask when commissions must be paid. You also ask, in the event that commissions are
not timely paid to a terminated employee, when waiting time penalties would begin and end.

Labor Code sections 201 and 202 require the payment of all earned and unpaid wages at the time of
termination in the event of a discharge, or within 72 hours in the event of a voluntary quit,
unless the employee gave notice of intent to quit at least 72 hours in advance of the last day to
be worked, in which case the wages are due on the last day worked. These requirements cannot "in
any way be contravened or set aside by a private agreement, whether written, oral, or implied."
(Labor Code §219) Labor Code §200 defines "wages" to include "commissions." Thus, the provisions
of sections 201 and 202 governing the payment of wages upon termination apply to any earned and
unpaid commissions. The central focus of inquiry, therefore, must be on when the employee "earns"
the commissions, rather than on when the employer subsequently calculates and pays these
commissions to its current employees.

A commission is "earned" when the employee has perfected the right to payment; that is, when all
of the legal conditions precedent have been met. Such conditions precedent are a matter of
contract between the employer and employee, subject to various limitations imposed by common law
or statute. Typically, in the retail sales industry, commissions may be "earned" when a sale is
made, when the merchandise is delivered to the customer, or when the customer pays for the
merchandise. Whatever the event (or events) that trigger the right to a commission, once that
event (or events) have occurred, the commission has been earned. The provisions of any contract
notwithstanding, courts will not enforce unlawful² or unconscionable³ terms, and will
construe any ambiguities against the employer to avoid a forfeiture.⁴ Moreover, a discharged
employee may assert common law doctrines such as "prevention" and "impossibility of performance"
as a basis for recovering commissions despite having failed to perform all of the conditions
precedent otherwise required. Finally, when a sale is preceded by solicitation and negotiation,
California courts have long held that the salesperson who is the procuring cause of the sale is
entitled to a commission even if the customer's order was subsequently received or taken by
someone else.⁵

In the event that commissions have been "earned" on or before the date of an employee's
termination, the employer must complete the necessary calculations and pay the commissions on the
date of the termination in the case of a discharge or a voluntary quit with more than 72 hours
prior notice, or within 72 hours of the termination in the case of a voluntary quit without such
prior notice. It is not permissible to wait until the customary time for calculating the
commissions of current employees, nor is it permissible to delay payment of such earned
commissions until the next regularly scheduled payday(s). If the commission has not yet been
earned at the time of termination, and is awaiting the completion of some legal condition
precedent (for example, receipt of the customer's payment), the commission must be paid to the
terminated employee immediately upon completion of the conditions precedent.

With respect to the commencement of waiting time penalties, these penalties commence under Labor
Code §203 at the "due date" for wages owed pursuant to Labor Code sections 201 or 202. Thus, in
the case of a discharge or voluntary quit with at least 72 hours prior notice, section 203
penalties commence immediately upon termination of employment, and in the case of a voluntary
quit without such prior notice, penalties commence 72 hours after the quit. Section 203 penalties
run for thirty calendar days or until all wages due are paid or until the employee commences an
action⁶ for unpaid wages, whichever occurs first. Penalties are calculated without regard to
the number of days the employee would have worked in this thirty day period. Rather, the
employee's per diem wage rate is multiplied by the number of days of non-payment, up to this
maximum of thirty days. Mamika v. Barca (1998) 68 Cal.App.4th 487.

As discussed above, a commissioned employee who was timely paid all wages that were "earned"
prior to his or her termination may subsequently "earn" additional commissions upon the
post-termination completion of conditions precedent, such as the employer's receipt of customer
payments. An employer's failure to pay any such commissions immediately once they are earned
(that is, once the legal conditions precedent have been met), will subject the employer to
section 203 penalties. These penalties would then commence on the date that the post-termination
commissions must be paid, and would run for up to thirty days or until full payment is made or an
action is commenced, whichever occurs first. See Cap Gemini America, Inc, v. Judd (Ind. App.
1992) 597 N.E.2d 1272.

It would be possible, in certain instances, to "bootstrap" penalties resulting from untimely
payment of wages owed at termination, with additional penalties resulting from untimely payment of
commissions earned after termination. For example, if an employee is discharged on May 10, and
does not receive payment for all wages that were due upon termination until May 30, he or she
would be entitled to twenty days of waiting time penalties. If that employee "earned"
post-termination commissions on June 1, and was not paid those commissions until June 10, the
employer would be liable for another ten days of penalties. Such "bootstrapping" is subject to two
limitations: first, the total number of days of penalties stemming from any single termination of
employment cannot exceed thirty days, and second, on any calendar day, only one day of penalties
can accrue.

Thank you for your interest in California wage and hour law. We hope this letter will help you in
assisting your client. Please feel free to contact this office with any other questions.

Sincerely,

Miles E. Locker
Chief Counsel

cc: Jose Millan
Tom Grogan
Greg Rupp
Nance Steffen