Commissions and bonuses are important income sources for many California employees. Employers value them too. They use them to motivate workers and reward performance.

Unfortunately, disputes over this type of pay are common. Employers sometimes refuse to pay bonuses or commissions rightfully earned by employees.

Why might payment be denied? The employer might not understand their legal duties, but sometimes the intent is less innocent.

Employers might try to exploit loopholes. They might unfairly change metrics after work is done. They might even fire employees solely to avoid paying large commissions or bonuses.

California law strongly protects earned bonuses and commissions. State law generally treats them as wages. Specific rules ensure fair calculation and timely payment. These rules protect employees from unfair denials.

Do you earn bonuses or commissions? It’s crucial to understand your rights. You need to know how to respond if your employer illegally withholds this pay.

This guide explains California’s rules for bonus and commission payments. We’ll help you understand your rights and options.

First, we’ll cover how state law defines commissions and bonuses. We’ll also discuss legal requirements for written commission agreements.

Then, we’ll explore common disputes arising over this pay. We’ll also go over legal options for independent contractors earning commissions before answering common questions about California bonus and commission law.

Defining Bonuses and Commissions Under California Labor Law

Understanding your rights regarding bonus and commission payments requires clear definitions.

These pay types are similar in some ways. Both act as financial incentives tied to performance. Critically, California law treats bonuses and commissions as wages. They aren’t simply optional extras separate from wage laws.1

Treating this pay as wages means key legal protections apply. Employers must keep accurate payment records. They must provide itemized wage statements (pay stubs). These statements should clearly show how bonuses or commissions were calculated. Failure to comply can lead to employer penalties.

Your overtime pay calculation is also affected if you’re non-exempt. We’ve covered overtime exemptions in our Guide to Understanding Overtime Laws in California.

Earned non-discretionary bonuses and commissions typically increase your regular rate of pay. That higher pay rate gets factored into your overtime pay.

But bonuses and commissions also differ from regular hourly pay or salary. They have specific rules about structure and payment.

A bonus can be paid for many reasons. Examples include meeting performance goals or company milestones, or it might be a reward for generally good work.

Bonuses can be discretionary. This gives the employer freedom in deciding whether and how much to pay.

Alternatively, bonuses can be non-discretionary. These are earned automatically when specific, pre-set criteria are met (like following a formula or contract term).

A commission, however, is payment specifically linked to sales made or services generated for your employer. California law requires employers to provide commissioned employees with a written agreement. This contract must detail how commissions are earned, calculated, and paid.

Let’s look closer now at commission agreements and different types of bonuses.

Discretionary and Non-Discretionary Bonuses Defined

California law identifies two main types of bonuses: discretionary and non-discretionary bonuses. Understanding the difference is important.

A discretionary bonus is generally paid at the employer’s choice. They decide when and how much. A year-end or holiday bonus given without set criteria is a common example.

These bonuses might seem like gifts. But legally, they are treated as taxable wages. Your employer usually withholds taxes from them.

Unlike gifts, discretionary bonuses are considered taxable income. This means your employer will withhold taxes from them.

The flip side is that, because they’re considered wages, discretionary bonuses are subject to certain legal protections. This means you can potentially dispute them in court if you believe you’re owed a bonus that your employer isn’t paying. This often depends on specific facts, promises, or established practices.

A court case provided clarity on bonus plans (Pfeister v. IBM (N.D. Cal. 2017) U.S. Dist. LEXIS 170970). It helped define when a bonus plan is truly discretionary under California law.

The Pfeister court indicated that bonus plans are discretionary only if:

The Pfeister court contrasted this with non-discretionary agreements. Bonus plans are non-discretionary if:

Non-discretionary bonuses have clear, objective triggers. You earn them automatically by meeting predefined criteria. Examples include hitting specific sales targets or completing a project by a set deadline.

What if a bonus was promised verbally? An oral bonus agreement can potentially be enforced as a contract. But proving the terms of an oral agreement is often difficult. Detailed notes and witness information can help.

The best practice is clear: get any bonus promises in writing.

Defining Commissions for California Employees

Commission agreements differ significantly from bonus plans. They tend to be more formal and legally binding.

California law defines commissions as compensation paid for services selling an employer’s property or services. The pay amount is based proportionally on the amount or value involved in the sale.3

Unlike some bonuses, commissions must be detailed in a written agreement in California. This requirement makes earned commissions inherently non-discretionary. You earn them by meeting the specific terms set out in that agreement.

Your employer is responsible for providing this written commission contract. But what if they fail to do so? Employers can’t use this as an excuse to deny commissions you earned based on a mutual understanding or agreement.

Now, let’s look closer at the specific legal requirements for commission agreements under California law.

What are the Specific Requirements for Commission Programs Under California Law?

California law has specific rules for employee commission agreements.4 Employers must follow these rules carefully. Failure to comply can lead to fines or other legal penalties.

Here are the key requirements for commission agreements:

These rules protect employees. They help ensure you receive all earned commissions fairly and on time. The “continued effect” rule helps ensure payment even if the commission isn’t paid out until after an agreement’s formal end date.

Some employers might try illegal tactics. One example? Firing an employee right before a large earned commission is due. We’ll cover that scenario below.

Remember: California law treats earned commissions as wages. This provides significant legal protection beyond just the terms of the written agreement itself.

Now, let’s discuss common types of commission disputes and legal issues.

Common Disputes Over Bonuses and Commissions

Bonus and commission payments are a frequent area of dispute between employers and employees. There are several common reasons.

Sometimes the payment terms are unclear, or employers may interpret performance goals in a way that disadvantages employees. Payments might also simply be delayed.

Your employer’s intent might not be malicious. But employers sometimes do deliberately withhold payments employees have earned.

Regardless of your employer’s motives, knowing your rights is crucial when a payment dispute arises.

Let’s look at some common types of bonus and commission disputes.

Disputes Related to Bonus Payments

Disputes often happen over bonus payments. An employee believes they earned a bonus. The employer disagrees or refuses to pay it.

Employers might claim performance goals weren’t met, or they might interpret a bonus plan unfairly in their own favor.

When deciding bonus disputes, courts look beyond just the written plan. Other factors often matter. Key factors courts consider include:

Basically, courts are looking for evidence of a mutual understanding. Did both employer and employee likely understand a bonus would be paid if certain conditions were met? Verbal promises or a history of past payments can be important evidence.

California law adds another layer of protection. Every employment contract includes an implied covenant of good faith and fair dealing. This means employers must act fairly and honestly when fulfilling contract terms, including bonus plans.

Employers can’t use unfair loopholes or deceptive tactics just to avoid paying earned bonuses. Acting in bad faith violates this implied duty.

Breaching a bonus agreement or the duty of good faith can lead to damages. An employee might recover the unpaid bonus amount. Sometimes interest and attorney’s fees may also be awarded.

Bonus disputes involve complex facts and legal arguments. It’s crucial to consult an experienced employment lawyer. They can review your specific bonus plan and advise you on your rights and options.

Disputes Related to Commission Payments

Written commission agreements aim for clarity. But disputes over earned commissions still happen frequently. Unclear contract terms are a common source of conflict.

Consider this example. An agreement states commissions are paid upon “successful completion of a sale.” What exactly does “successful completion” mean?

The employer might claim it requires full payment received from the client. The employee might believe securing the signed contract itself earns the commission. This ambiguity leads to disputes.

How do courts resolve unclear agreement terms? They try to determine the parties’ mutual intentions when they made the deal.

Courts examine the specific language used in the agreement. They consider the business context and relevant industry standards. They also look at how both the employer and employee actually performed under the agreement.

What if the parties’ intention remains unclear after reviewing these factors? California contract law often applies a specific rule here. It’s called contra proferentem. This Latin phrase means “against the offeror.”

This legal principle usually means ambiguity is interpreted against the party who wrote the contract. In employment, that’s the employer. Courts reason the drafter is responsible for clear language.

The law might favor you if terms are truly ambiguous. But it’s always better to prevent disputes proactively.

Read your commission agreement thoroughly and carefully. Ask your employer to clarify any unclear terms before issues arise.

Also document any important verbal promises made about your commissions. Note dates, the specific promise made, and who made it.

Ultimately, the best protection is a clear, detailed written commission agreement that meets California legal requirements. But remember, you can still pursue earned commissions even if the terms were unclear or your employer failed to provide a written agreement at all.

Disputes Related to Commission Payments Following an Employee’s Termination

Commission agreements typically end when your employment terminates.

But California law protects earned commissions. These commissions are generally still owed to you even if you quit or are terminated before payment is made.

What does “earned” mean here? It generally means you completed all the substantial conditions required of you to secure that commission before your employment ended. The exact point depends on your specific commission agreement’s terms.

If a commission was truly earned according prior to your departure, your former employer must still pay it out according to the agreed schedule or within a reasonable time.

Consider a salesperson. They land a major client contract. Their commission is due only after the client’s first payment. The salesperson is fired before that payment arrives.

That payment requirement is a condition precedent, meaning an event that must take place before the commission is formally due.

The employer might argue no commission is owed. They might say the condition wasn’t met during employment.

California courts often reject this argument. Did the salesperson do everything needed on their end before termination? Then the commission is likely still considered earned and owed.

Furthermore, firing someone specifically to avoid paying an upcoming large commission is likely illegal.

Employers also cannot deliberately prevent a condition precedent from happening just to block a commission payment.6  Firing an employee simply for complaining about unpaid earned commissions may also violate public policy.7

Our Guide to Wrongful Termination in California covers these topics more broadly.

What about contract clauses stating termination forfeits commissions? These are forfeiture provisions. California courts sometimes find them unconscionable.

An unconscionable clause is grossly unfair and legally unenforceable. Whether a specific clause is enforceable depends on the exact wording and circumstances.8

The key takeaway? Commission agreements don’t allow employers to act unfairly or violate California wage laws. Earned commissions are protected wages. Employers must handle them in good faith.

Disputes Related to Commission Chargebacks

Employers might pay commissions before a sale is truly final. A chargeback occurs when they later deduct or require repayment of that advanced commission. Specific rules apply to chargebacks in California.

California law strongly protects earned wages. Employers generally can’t take back wages from employees once those wages are legally earned.9

Your commission agreement itself defines when a commission is considered “earned.” A chargeback of an advance might be permissible if you don’t meet the terms of that agreement.

For example, an agreement might clearly state a commission isn’t fully earned until after a customer’s return period expires. If the customer returns the item during that period, a chargeback might be allowed if spelled out in the agreement.

Employers must follow these rules when using chargebacks:

Also, employers can’t use chargebacks to shift basic business costs onto employees. Deducting money for things like office supplies, marketing expenses, or shipping fees is generally illegal.

However, a commission agreement might include other lawful deductions directly related to calculating the final commission amount (like deducting costs of goods returned affecting the net sale value). These deductions must be clearly explained and agreed upon in writing.11

Which Commission Laws Apply to Independent Contractors in California?

What about independent contractors earning commissions? The rules discussed earlier mainly protect employees. Different rules apply to independent contractors.

First, ensure correct classification. Employers sometimes misclassify employees as independent contractors. This is a serious violation in California. It can deny workers critical rights and benefits.

The burden is on the employer to prove independent contractor status. California uses strict legal tests (like the ABC Test). If misclassified, you may be owed unpaid wages (including overtime and missed breaks) and other penalties.

These damages can really add up over time. It’s vital to consult with an experienced employment attorney. You can also read our Guide to California Laws on Independent Contractors for more information.

What if you are correctly classified as an independent contractor? You still have contract rights. A specific California law protects certain independent contractors earning commissions.

Civil Code § 1738.13 applies to independent wholesale sales representatives. It requires principals (companies) using these reps to provide a written contract. The contract must detail commission calculation methods. It must also state how and when commissions will be paid.12 

Unfortunately, some companies don’t follow this specific requirement. They might wrongly assume independent contractor status means fewer obligations regarding commission pay.

Fortunately, independent contractors have access to a powerful tool for enforcing contract rights called a private right of action. This means filing a lawsuit directly against the company in court rather than filing a complaint through a state labor agency.

If you succeed in court, the company may owe you treble damages. That’s three times the amount of commissions owed. They may also have to pay your attorney fees.13 

Treble damages generally aren’t available for merely negligent or good-faith violations. The conduct must be willful and/or reckless, and proving this can be complex.

Courts examine the specific facts and all relevant evidence. This includes employer conduct and communications. But even if your employer acted in good faith, you can still potentially recover the amount owed, plus attorney’s fees.

What Should I Do if My Employer is Withholding my Bonuses or Commissions?

We’ve described various steps to prevent bonus or commission disputes. Being proactive is generally the best strategy.

Carefully examine your bonus or commission agreement’s language. Ask your employer to clarify unclear terms, and try to get clarifications in writing.

Also document any specific oral promises made about bonuses or commissions. Note dates, details, and who made the promise. But always aim to get important payment terms confirmed in writing.

Sometimes disputes happen anyway, despite these precautions. What if your employer withholds payments you believe you’ve rightfully earned? You still have legal options.

California’s courts consider many factors when resolving these disputes. The written agreement language matters. But so do employer communications, past practices, and industry standards.

The best way to understand your specific situation and options is to talk to an experienced California employment lawyer. They can evaluate your potential claim based on all the facts.

Many employment lawyers offer a free initial consultation. This gives you a chance to discuss your case confidentially. It comes with no obligation to hire the lawyer or file a lawsuit.

Also ask if the lawyer works on contingency. This fee structure usually means you pay no attorney fees unless and until they recover money for you through a settlement or court judgment.

We assist California employees with bonus and commission disputes and can help you understand your rights and options. Contact us for a free, confidential consultation using the button below (mobile) or above (desktop).

Answers to Common Questions About Commissions and Bonus Payments in California

Citations

1. Cal. Lab. Code § 200 (go back)
2. See, e.g., Pfeister v. IBM (N.D. Cal. 2017) U.S. Dist. LEXIS 170970, *14-16 (go back)
3. Cal. Lab. Code § 204.1 (go back)
4. Cal. Lab. Code § 2751 (go back)
5. Cal. Lab. Code § 218.5 (go back)
6. DLSE Opn. Letter No. 1999.01.09 (January 9, 1999), p. 3 (go back)
7. See, e.g., Lopez v. Smiths Detection, Inc. (S.D. Cal. 2021) U.S. Dist. LEXIS 14211, at *16-17 (go back)
8. See, e.g., Ellis v. McKinnon Broadcasting Co. (1993) 18 Cal.App.4th 1796, 1803-07 ; see also American Software Inc. v. Ali (1996) 46 Cal.App.4th 1386. (go back)
9. Cal. Lab. Code § 221 (go back)
10. See Hudgins v. Neiman Marcus Group (1995) 34 Cal.App.4th 1109, 1115-17, 1124; Aguilar v. Zep Inc. (N.D. Cal. 2014) U.S. Dist. LEXIS 120315, *45 (go back)
11. See Davis v. Farmers Ins. Exchange (2016) 245 Cal.App.4th 1302, 1332. (go back)
12. Cal. Civ. Code § 1738.10, et seq. (go back)
13. Cal. Civ. Code, § 1738.15 (go back)