Point of View: State of California’s stance on post-termination commissions
Attorney Jerry Schreibstein, then of Kelly, Herlihy & Klein LLP, wrote to the State of California Division of Labor Standards Enforcement in March 2003 for their guidance regarding a client who has a compensation system that pays sales commissions quarterly. A condition of payment is employment at the time of the quarterly payment.
Schreibstein argues that this compensation system is in-line with California law, citing Lucien v. Allstate Trucking (1982; 16 Cal.App.3d 972) in which a former employee who voluntarily terminated his employment sued for his share of a bonus plan he was denied because the bonus was not payable ‘until the end of a fixed period.’ The Division of Labor Standards Enforcement responded to this example by pointing out that his client’s matter involves commissions, not bonuses. Commissions are wages calculated and owed upon the completion of a sale, and must be paid according to Labor Code § 204, which stipulates that wages earned are owed to an employee twice each calendar month. Schreibstein’s client’s compensation system does not meet that requirement.
The second case that Schreibstein cites is American Software, Inc. v Ali (1996; 46 Cal.App.4th 1386), which he states upheld an employee policy in which a requirement of commission payment is that sales representatives are employed at the time of customer payment. The Division of Labor Standards Enforcement responded that for a number of reasons, this case is not relevant the matter of his client’s compensation system. They point to substantial differences between American Software, Inc. v Ali and his client’s situation, including American Software employees earning commission in part for the servicing of an account after the sale is made, and a shared risk not present in Schreibstein’s client’s compensation system.
The final word of the Division of Labor Standards Enforcement is that withholding payment of earned commissions until the end of a three-month period is in violation of California’s Labor Code.
You can read the direct communication from H. Thomas Cadell, Jr., the Attorney for the Labor Commissioner, to Schreibstein here.