Commission calculations
STATE OF CALIFORNIA GRAY DAVIS, Governor
DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT
Santa Rosa Legal Section
50 D Street, Suite 360
Santa Rosa, CA 95404
(707) 576-6788
H. THOMAS CADELL, Of Counsel
June 13, 2002
Stuart MacLeod
525 Manhattan Ave., #B
Hermosa Beach, CA 90254
Re: Commission Calculations
Dear Mr. MacLeod:
Anne Stevason, Acting Chief Counsel of the Division, has asked
me to respond on behalf of the Division of Labor Standards
Enforcement to your letter of April 8, 2002.
In your letter you inquire regarding your employer's policy
which provides:
"Salespersons will be paid commissions on a monthly basis
within thirty days from the last day of the month in which the
commissions are earned. Commissions are earned on a monthly
basis subject to the following guidelines: [¶]a) Each month 50%
of the total of any invoice which has been transferred from
'Accounts Receivable' to the 'Reserve for Bad-Debts' account
during the month will be deducted from the respective
salesperson's commissions account. [¶] An invoice will be
transferred to the 'Reserve for Bad-Debts' account at such
time that the invoice has been unpaid for ninety days from the
date of the invoice.[¶]If, and at such time, that an invoice
which has been transferred to the Reserve for Bad-Debts'
account is subsequently paid in full, fifty-percent of the
total invoice amount of that invoice will then be credited to
the salesperson's 'accrued commissions payable' account. [¶] b)
Thereafter, the salesperson will receive a credit to his or
her commissions account for invoices that are paid during a
month pursuant to the following: [¶]Commissions will be
credited to a salesperson's commissions account only after an
invoice is paid in full.[¶]Commissions shall be equal to a
percentage (determined by the officers of the company) of the
gross profit earned on the sale, i.e., the difference between
the sales price of the coffee sold and the cost of the coffee,
including freight-in, determined on a FIFO (First-in, First-
out) basis. [¶]Monthly commissions shall be deemed earned only
after the total amount from paragraph a) is deducted from the
amount in paragraph b), above. If the amount in paragraph a)
exceeds the amount in paragraph b) the salesperson will have
a negative balance on his or her commissions account until the
next month.[¶]Upon termination of employment, salespersons
shall be paid only those commissions earned within 30 days of
the salespersons' termination date."
You state that your commission is 15% of the gross profit of
the sale you have made. Your concern is that you are held liable
for 50% of the entire invoice if that invoice is not paid. We
would like to address that concern as well as other concerns we
have with the commission plan.
It would be permissible for an employer to have a commission
policy which provided that in the event that an account was not
paid, the commissions paid on that account would be recovered from
future commissions paid to the salesperson. However, to debit the
salesperson for the cost incurred by the employer as a result of
the default in payment is not allowed in California. In the case
of Quillian v. Lion Oil (1979) 96 Cal.App.3d 156; 157 Cal.Rptr.
740, the court cited to established California law which recognized
that "the employees, through the company's policy of deducting
losses, were in effect made insurers of the employer's merchandise,
and the commissions earned by the employees which were subject to
the deduction, served the same purpose as an employee's "bond"
exacted by the employer to cover shortages." (Citing Kerr's
Catering Service v. Department of Industrial Relations (1962) 57
Cal.2d 319, 19 Cal.Rptr. 492, 369 P.2d 20) The Quillian court
noted that "Deductions were made, therefore, for losses beyond the
employees' control." Again, in the case of Hudgins v. Neiman
Marcus (1995) 34 Cal.App.4th 1109, the California courts reached
the same conclusion holding that "employees may not be made the
insurers of business losses suffered by the employer".
Thus, based on the facts you present and the case law in
California, it is the opinion of the Division of Labor Standards
Enforcement that the California courts would find the deduction by
the employer of 50% of the cost of the goods sold from earned
commissions is illegal. (See Labor Code §§ 221, 224)
In addition, the provision in the commission policy which
purports to limit the commissions earned by a salesperson to those
earned within 30 days of the salesperson's termination may be, on
its face, illegal as well. In the case of Ellis v. McKinnon Broad-
casting Co. (1993) 18 Cal.App.4th 1796, the California court held
a forfeiture clause in a written employment contract providing that
upon termination, salesman shall only be entitled to commissions on
fees collected through final date of actual employment was
substantively unconscionable, even if salesman knew or should have
known of the provision. The court found that the clause enured to
the benefit of the employer, the party with superior bargaining
power which inserted it in a standard form employment contract. The
court found that the clause was void as a result of the provisions
of California Civil Code § 1670.5 coupled with the historical
protections afforded wages in this state.
The California courts have long held that commissions must be
paid to salespersons who are the procuring cause of the sale
regardless of the termination of the employment. (See Watson v.
Wood Dimension (1989) 209 Cal.App.3d 1359; Zinn v. Ex-Cell-O Corp.
(1944) 24 Cal.2d 290; Willison v. Turner Resilient Floors (1949) 89
Cal.App.2d 589, holding that "He who shakes the tree is the one to
gather the fruit")
We hope this adequately addresses the concerns you raised in
your letter of April 8, 2002. Please excuse the delay in respond-
ing which is the result of many requests for opinions.
Yours truly,
H. THOMAS CADELL, JR.
Attorney for the Labor Commissioner
c.c. Arthur Lujan, State Labor Commissioner
Tom Grogan, Chief Deputy Labor Commissioner
Anne Stevason, Acting Chief Counsel
Assistant Labor Commissioners
Regional Managers