Commissions & Bonus Pay
In addition to an hourly wage or salary, many California employers also provide employees incentive pay in the form of bonuses and commissions. Although bonuses and commissions may seem similar, or in some circumstances identical, they are not the same type of compensation and they have different characteristics and legal requirements.
Commissions are almost always associated with sales jobs and can be paid in addition to an employee’s regular wage or salary or, in some circumstances, as the sole form of compensation. Commissions are defined as the sum of compensation paid to an employee for their services in the sale of an employer’s product that is calculated upon a portion of the percentage of the sale. In California, an employer who offers an employee commission pay must put the terms and conditions of the commission plan in writing, so the employee has a clear understanding of how commission is earned. In calculating commissions, an employer cannot make deductions for business losses that might result for even the employee’s simply negligence, nor can the cost of doing business be passed to the employee.
While regular wages (hourly pay, salary, vacation, etc.) are due within no more than seventy-two (72) hours of the separation of employment, commissions are slightly different. Since earned commissions are not always immediately ascertainable, and rely on external factors, commission wages must then be paid as soon as they can be properly calculated. An employer cannot, however, terminate an employee to solely avoid the payment of commissions. In such cases, an employee can claim they have been prevented from completing the duties necessary to earn the commission and can be entitled to a portion of the pay.
Bonus pay is not limited to sales and is incentive compensation for employees in nearly all industries when offered by an employer. A bonus is different from a commission because a bonus is not based on the percentage of the sale of an employer’s product or service, but rather, a designated sum to reward an employee’s performance. This can be true even in the sales context where an employer pays a salesperson a flat sum if they make one hundred (100) customer calls per week, regardless of the sales they complete
Bonuses can be either contractual or discretionary. When contractual, an employer might offer a flat sum to employees who meet specified performance goals similar to the example about customer calls above. An employer can also pay a discretionary bonus to employees when the employer decides that an employee’s performance or business profit warrant the additional compensation reward.
An employer is not required by law to include bonus pay in an employee’s regular compensation package. Bonus pay is a decision made exclusively by the employer, and the employer can, under certain circumstances, impose certain conditions to ensure an employee earns the bonus. For example, it is not necessarily unlawful for an employer to require an employee to remain employed for one (1) year to receive a signing or retention bonus. On the other hand, similar to commission pay, an employer cannot willfully work to avoid payment of a bonus when the specified conditions of a bonus are met. If an employee is terminated after they have accomplished the necessary work to earn a contractual bonus, and are only waiting for payment to be issues, the employer may still be required to pay a portion of the bonus. This would likely not apply to a discretionary bonus, unless the amount of payment was previously communicated with specificity.
Similar to the failure to pay regular wages, the failure to pay a commission or bonus after the separation of employment can entitle an employee to waiting time penalties in addition to the underlying bonus and commission.
If you have any questions about the calculation or payment of commissions or bonuses, please contact the Orange County employment attorneys at Ares Law Group.