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November 2008
California Law on Paying Salespeople Their Expenses, Overtime and Commission
Prepared By: Melissa C. Marsh, Los Angeles Employment Attorney
Unreimbursed Expenses.
Pursuant to California Labor Code §2802, California employers are required to reimburse their employees for all “necessary expenditures... incurred by the employee in direct consequence of the discharge of his or her duties...” This includes sales associates whose primary compensation is commission based, and pursuant to the California Labor Code employers are prohibited from deducting such necessary business related expenses from the employee's compensation. Commonly reimbursed business related expenses incurred by sales persons include:
- training and seminar costs
- mileage
- cell phone expenses
- telephone charges
- postage and other office supply expenses
- advertising costs
- subscriptions
- business lunches
- costs associated with transaction errors; and
- costs to settle disputes with customers
If an employer fails to reimburse the employee, the employer may be held responsible for the employee's out-of-pocket costs plus interest from the date the employee incurred the expense as well as the employee's attorneys fees and costs to collect the unreimbursed expenses.
Unpaid Overtime.
Oftentimes employers misclassify certain commission based sales people as exempt from overtime. California law makes a distinction between outside salespersons and inside salesperson, when making a determination as to whether the sales person is exempt from overtime.
Pursuant to California law, an inside salesperson is exempt from overtime compensation if:
- the salesperson is employed in either the "mercantile industry" (covered by Wage Order 7) or in a "professional, technical, clerical, mechanical and similar occupations" (covered by Wage Order 4); AND
- the salesperson's primary duty is to make “sales,” or obtain orders, or to obtain contracts for services; AND
- the salesperson’s regular rate of pay exceeds one and one-half times the applicable minimum wage; AND
- more than 50% of the salesperson's compensation in each pay period represents commissions from a bona-fide commission structure.
An outside salesperson, on the other hand, is exempt from overtime compensation if:
- the salesperson is age 18 or older; AND
- the salesperson's primary duty is to make “sales,” or obtain orders, or to obtain contracts for services; AND
- the salesperson spends more than 50% of their working time away from the Employer's place of business “selling” or obtaining orders or contracts for products, services or use of facilities at potential customer's establishments.
It should be noted that pursuant to California law "outside sales activities" does not include:
- time spent making sales by mail, telephone or the Internet;
- time spent at a home office, or some other fixed location, as a headquarters from which to make calls; or
- time spent making incidental deliveries, providing maintenance or repair services, or engaging in collection activities.
Consequently, employees who primarily engage in sales activities by mail, telephone, or the internet (even from home) are not engaged in what California law deems "outside sales activities" and therefore to be exempt from overtime must meet the standards set forth for "inside salespersons."
Charge Backs.
Employers who have instituted a charge back policy with their sales associates should be mindful that such a policy is only valid and legal if: (1) the charge back results from a commission that was advanced, not earned; (2) the charge back is deducted from future unpaid commissions, not the sales person's base salary; and (3) the compensation scheme is acknowledged and agreed to by the employee in writing. See, California Labor Code Sections 200, 221, 224 and See, Koehl v. Verio, 142 Cal.App.4th 1313 (2006).
In Koehl, a few former employees filed a class action lawsuit against Verio claiming that Verio's charge back compensation scheme violated California’s labor laws. Verio's charge back compensation scheme provided its sales staff with a base salary plus commissions. The commissions were deemed earned when Verio received payment from the customer, but Verio agreed in a written employment agreement to advance payment of the commission to its sales staff when the order was placed, subject to a charge back if the order was later cancelled (within a specified time). In the event of a cancellation, Verio would charge back (deduct) the advanced pre-paid commission from the employee's then pending commissions (not from the employee's base salary).
The California Court of Appeal affirmed the judgment in favor of Verio ruling that (1) advances of unearned commissions are not “wages” under Labor Code §221; and (2) charge backs resulting from advanced commissions may under Labor Code §221 and §224 be legally deducted from unpaid commissions (not base salary) if the charge back arrangement is expressly agreed to by the employee in a written contract. The appellate court further noted that even if the advanced commission payments were “wages,” an employer may still legally deduct them under Labor Code §224 if the deduction: (1) is authorized in writing; and (2) does not reduce the employee's standard wage (base salary).
In light of the appellate court's holding in Koehl, California employers who charge back advanced commissions from their employees should: (1) obtain each employee’s written acknowledgment and agreement to the chargeback arrangement; (2) only deduct advanced commissions from future unpaid commissions, not from the employee’s base pay; and (3) only apply a chargeback to the particular employee responsible for generating the sale, not from a group or team of employees.
Payment of Commissions.
Although the Labor Code does not provide an exact time when commissions are to be paid, the Department of Labor Standards and Enforcement (DLSE) typically provides that a commission must be paid in the pay period in which it is earned. California Labor Code §210 provides for a penalty of $100 per employee for each failure to pay as required and a penalty of $200 plus 25 percent of the amount unlawfully withheld for each subsequent violation, or any intentional or willful violation. Employees can also recover attorney fees and costs as well as interest at 10 percent per annum pursuant to Labor Code sections 218.5 and 218.6.
Upon termination, the employer must pay a commissioned salesperson his or her accrued base salary immediately and any earned and unpaid commissions prior to the date of termination within 72 hours of the termination date. If the employer fails to pay the earned unpaid commissions within 72 hours, the employee may bring a suit seeking treble damages. As for the payment of commissions on sales completed after termination, the Labor Commissioner's position is that the salesperson is entitled to a commission if he or she is the "procuring cause" of the transaction, unless a written employment contract states otherwise. Various court cases have awarded the former salesperson his or her commission, even when the sale was consummated 90 days after termination.
Our employment law practice consists of: (1) assisting employees with their wage claims and (2) counseling employers who seek to comply with new state and federal employment laws, providing human resource training, and providing essential contracts and employee policies to prevent employee lawsuits. To schedule a consultation with employment lawyer, Melissa C. Marsh, call 818-849-5206 or Send Us An Email.
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California employment lawyer, Melissa C. Marsh, is based in Sherman Oaks and West Hollywood, and serves individuals and businesses throughout Los Angeles County, including: West Hollywood, Miracle Mile, Beverly Hills, Century City, Santa Monica, Burbank, North Hollywood, Valley Village, Toluca Lake, Studio City, Sherman Oaks, Van Nuys, Encino, and Woodland Hills.
© 2008 Melissa C. Marsh. All Rights Reserved.
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