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Commission paid on gross margin---legal? California

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  • Commission paid on gross margin---legal? California

    We are a construction company in California with an inside salesperson who is paid a weekly draw against commission. The commission amount is a sliding scale based on the produced gross profit of the job. The draw is adjusted depending upon the commission pipeline.

    The salesperson ordered about $4k in product without written approval from the client who is now refusing the order.

    Two questions (please):
    1. Is is legal to pay a commission based on the gross margin of the job?
    2. Is is legal to reduce the commission on this job for a mistake made by the salesperson?

    Apparently this employee talked with someone at the California Labor Board who said it was NOT legal to pay commission based on GM, but that is not what our understanding is.

    Any info to unravel this case will be appreciated by both parties who wish to continue to work together --- but legally!

  • #2
    Even though the employer is not legally required to pay the employee commission at all (as long as the employee is making at least minimum wage, or is exempt from these laws as per the section 7(i) exemption in the FSLA) since the employer is choosing to make commission part of the employee's pay - I don't think it can be legally withheld, even if the employee has made a costly mistake and the employer believes this money is owed them.

    The employer will need to seek compensation through legal channels (small claims court, if the amount is not too great) or either get the employee's permission to withhold this amount from their pay. So long as the employee agrees to the withholding (in writing, I believe) there shouldn't be an issue.


    • #3
      Commissions are conditionally earned wages. I am fairly sure that it is possible to write a legal commission policy based on gross margins. I am positive that it is possible to write a legal commission policy based on cash basis sales actually paid by the customer, so that the commissioned employee is at risk for invoices not paid because my last employer had such a policy and won several claims filed with CA-EDD.

      IMO, the key issue with commissions is having a properly written and communicated commission policy in place BEFORE any sales take place, and then to follow the policy. Change the policy after the fact, or fail to communicate the rules to the employee prior to the employee working to earn the commission, and grey areas have just been created. The employer will not necessarily lose a wage claim but they will not necessarily win it either.

      While CA has tougher commission rules then many other states, my last employer's legal department felt that a formal commission policy that was legal in CA would probably be also be legal in the other states we did business in.


      Also, at the risk of slightly changing the subject, different types of employees (say Exempt vs. Non-Exempt) have very different FLSA rules associated with commissions.
      "Reality is that which, when you stop believing in it, doesn't go away".
      Philip K. **** (1928-1982)


      • #4
        I don't have a problem with the gross margin commission.

        You can't get back the money for the mistakenly ordered product. That is a business expense, and the company has to eat it.

        You can disipline or fire the employee, though.
        Megan E. Ross, Esq.
        Law Offices of Michael Tracy

        Disclaimer: The above response is a general statement of the law and should not be relied upon as legal advice. It only assumes the facts that are stated in the message. The above response does not serve to form an attorney-client relationship.


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