Commission payments: timing under Labor Code section 204

STATE OF CALIFORNIA DRAY 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

                                 December 9,   2002

William J. Carroll, Esq.
Morgenstein & Jubelirer LLP
One Market Street
Spear Street Tower, 32nd Floor
San Francisco, CA 94105

      Re:       Commission Payments (00329)

Dear Mr. Carroll:

 This is in response to your letter of October 7, 2002,

directed to Labor Commissioner Arthur Lujan, concerning the above-
referenced subject.

 In your letter you seek an opinion regarding the requirements

of California Labor Code § 204 as they relate to the timing of
commission payments to sales employees engaged in origination of
home mortgage loans. The employees in question are compensated by
your client through a combination of draws and commissions.
Pursuant to a written compensation agreement, draws are paid on a
bi-weekly basis and commissions are paid on a monthly basis. The
commission due on a given loan is calculated by means of a formula
consisting of the loan amount, multiplied by the applicable
commission rate. Commissions vary, depending upon the source of
the loan and the total monthly volume of loan closings (it is not
entirely clear whether the "loan closings" represent all loans
closed by the firm or department of the firm during the month, or
those loans closed by the individual employee; for purposes of this
letter we assume the closings represent the loans closed by the
individual employee).
Consequently, the commission rate cannot be determined until after
the month is completed and the total closings are calculated.

 You attach a copy of Opinion Letter 1993.03.08 which dealt

with commission payments of account executives for a national
advertising firm. While that portion of the letter dealing with
the applicability of Labor Code § 204 is relevant, the letter
addresses issues in a unique sales environment (advertising) and
deals with "outside sales". For those reasons, some of the 1993
letter is not relevant to the situation you describe.

 As the 1993 letter recites, DLSE does take the position that

Labor Code § 204 does not provide a test as to when commission
wages are calculated.

 Commission programs which calculate the amount owed once a

month (or less often) are common. Commissions are due and payable
after the reasonable conditions precedent of the employment agree-
ment have been met. If commissions cannot be calculated until
after an event has happened then the commissions are not "earned"
within the meaning of Section 204 until the happening of that event
so long as the event is reasonably tied to the calculation. So long
as the agreement is clear and unambiguous, and the draw is paid in
a timely manner (unlike the situation in the 1993 letter which
dealt with outside sales, the employees you describe would be
subject to the IWC Orders and, consequently, the draw paid must
provide for at least minimum wage for all hours worked in the pay
period — overtime wages earned in the pay period must be paid no
later than the following pay day), the commission is not "earned",
within the meaning of Section 204, until the agreed calculation
becomes ascertainable.

 The program you describe in your letter which calculates and

pays the commission once a month as soon as the applicable
commission rate can be determined would appear to meet the require­
ments of Labor Code § 204.

 It is important to point out, as well, that in cases where the

commission cannot be ascertained until the happening of a condition
subsequent, the imposition of penalties under Labor Code § 203 in
the event of termination of employment (see Labor Code §§ 201 and
202) would not be appropriate. Those commissions which were not
reasonably ascertainable would not be "due".

 We would also note that you mention that in the 1993 letter

the DLSE opined that many of the issues which arise in employment
contracts are not addressed in the Labor Code. As you state, we
pointed out in the 1993 letter that the interpretation of common
law contract doctrines are within the sole discretion of the
courts. We, of course, stand by that statement; however, we would
not want there to be any question that, in fact, the Labor
Commissioner has the authority to adjudicate employment contract
disputes (Labor Code § 96), applying the common law concepts which
have been adopted by the courts. We pointed out that most
employment contracts are contracts of adhesion the terms of which
are most strictly construed against the employer.

 We hope this adequately addresses the issues you raised in

your letter to Commissioner Lujan. We thank you for your continued
interest in California labor law.

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, Chief Counsel
Assistant Labor Commissioners
Regional Managers