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Re: Post Termination Commissions (909)

Dear Mr. Schreibstein:

If we understand your letter correctly, your client’s plan
involves “commissions on sales”, not a bonus. The commissions on
sales, as a matter of fact, are wages calculated and owed upon
the completion of the sale and must be paid in accordance with
the provisions of Labor Code § 204. That provision of the law
requires that wages earned are due and must be paid twice during
each calendar month on days designated in advance by the employer
as the regular paydays.

Thus, initially, the plan your client has implemented which
pays the commissions on sales on a quarterly basis does not meet

2003.04.30

the requirements of the California Labor Code even if there were
no forfeiture clause such as you describe involved.

The other case which you cite is American Software, Inc. v.
Ali (1996) 46 Cal.App.4th 1386, which, as you state, upheld an
employer policy which stated that sales representatives would be
paid commissions on orders only if currently employed at the time
of customer payment. However, unless there are facts involved in
the sales program you describe which you have not mentioned in
your letter, the case is not on point. In the American Software
case the court noted:

“Our survey of case law indicates that the contract
provision challenged here is commonplace in employment
contracts with sales representatives, such as Ali, who have
ongoing responsibilities to ‘service’ the account once the
sale is made.” Id., at 1393

There is no mention in your letter that the salespeople had
any on-going duties to service the accounts upon which the
commissions were based as was the case in American Software.

Also, absence of the unique facts found in American Software
concerning the termination of the right to the commissions only
on those accounts for which payment was not received¹ within 30
days after severance of the employment would, we are sure you
would agree, have an impact on the question of whether the
contract shocked the conscience of a reasonable person. Our
understanding of the pay program used by your client is that any
commissions earned during the quarter when the termination
occurred would be forfeited. If that is not correct, please
advise.

In addition, the unique facts in the American Software case
indicate that the employment contract provided for a salary plus
a draw on the commissions which, in the event of termination, was
not recoverable by the employer.  The court discussed this
feature and explained that in the court’s view, “American
Software took the risk that at the time of Ali's termination, she
would not have earned sufficient commissions to cover the
substantial draws ‘credited’ to her.” This risk by the employer
was in the nature of a quid pro quo for Ali’s risk that some of
her commissions would be lost as a result of the fact that
payment was received by the employer more than thirty days after
termination. (Id., at 1395)

Clearly, the case of American Software v. Ali is
distinguishable as a result of its unique facts from most
employment contracts. The American Software court recognized
this when it noted: “In short, this case [American Software] is a
far cry from those cases where fine print, complex terminology,
and presentation of a contract on a take-it-or-leave-it basis

Reasonable conditions may be placed upon the right to recover
commissions. For instance, it is sometimes permissible to require that the
contract upon which the commissions are based is not complete until payment of
the contract price to the employer. Again, however, those facts are not
discussed in your description of your client’s plan.

2003.04.30

Jerry Schreibstein
April 30, 2003
Page 3
constitutes the groundwork for a finding of unconscionability.”
(Id., at 1392)

To summarize then, we would first point out that commissions
earned on a sale must be paid within the pay period pursuant to
the provisions of Labor Code § 204. Withholding payment of
earned commissions until the end of a three-month period would be
a violation of California’s Labor Code.

Additionally, any earned commissions may not be forfeited.
As pointed out above, reasonable conditions may be placed on the
vesting of the commissions; but once vested, the commissions may
not be forfeited as a result of the fact that the employee
terminates the employment. We might also point out that common
law contract doctrines (prevention) would prevent an employer
from forfeiting commissions which would have been earned by
discharging the employee before those commissions vest.

We hope this adequately addresses the issues you raised in
your March 20th letter. Thank you for your 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

2003.04.30

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