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Is it legal to bring on an employee for commission only?

Michael Scherbourg's Profile

commission only employeesWe are looking to bring on a sales leader for commission only. That is, if it is legal to hire someone for only sales percentage (and stock options). Is there any issue with that? CA resident, by the way.

Answers

Kent Mannis
Title: Managing Editor
Company: LawRoom
(Managing Editor, LawRoom) |

Although commission-only is okay in some circumstances for some positions, it may be problematic for a "sales leader" to be paid this way.

One problem has to do with the wage-and-hour requirements and exempt/non-exempt employees. Typically, employees are considered non-exempt and entitled to the minimum wage for each hour worked (plus overtime, strict timekeeping requirements, paid breaks, etc.) unless they qualify for an "exempt" category.

(Note: It's likely that salespeople's commissions will exceed the minimum wage allowing them to be treated as non-exempt employees. However, if they don't qualify as "exempt," employers will have to ensure the workers' pay satisfies the minimum wage every payday, check for and pay extra overtime premiums every week, as well as comply with other strict requirements that employers usually wish to avoid for commission-only workers.)

"Outside sales" is one exempt category, so traveling salespeople are often commission-only. However, for "leaders" (and if by that you mean a "supervisor") whose primary duty is leadership (or, in legalese, "management duties by an executive employee"), these white-collar workers need to be paid a fixed salary to qualify as exempt. And, commissions that vary week-to-week won't qualify as a salary.

Some "inside sales" is also exempt (in businesses covered by California Wage Orders 4 or 7), so some California companies (but not all) can have commission-only salespeople who work in the office.

As this message indicates, you can't tell whether someone is an exempt salesperson (meaning they can be paid commission-only), or an exempt employee needing a salary, or a non-exempt employee (who must be paid overtime), simply by knowing their title and how they're paid. Instead, you have to analyze their actual duties and see if they qualify for one of the exempt categories.

LawRoom's Memo 1900 Exempt Inside Sales and Memo 1910 Exempt Outside Sales discuss both the California and federal rules and exceptions for commission-only exempt employees. Memo 1725 Exempt Executive Employees covers the salaried-supervisor exemption.

For official help from the web, check out the California Labor Commissioner's exemption FAQ at http://www.dir.ca.gov/dlse/FAQ_OvertimeExemptions.htm and the federal Labor Department's outside sales fact sheet at http://www.dol.gov/whd/regs/compliance/fairpay/fs17f_outsidesales.htm or the inside commission fact sheet at http://www.dol.gov/whd/regs/compliance/whdfs20.htm online. Remember, you have to comply with both the California and federal rules.

Good luck!

Michael Scherbourg
Title: CFO
Company: Miklan Manufacturing
(CFO, Miklan Manufacturing) |

Tremendously helpful answer! Thank you Kent.

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

Michael, depending on which way you decide to go, you might want to get a copy of this free...
"Sample Outside Sales Commision Agreement:"

https://www.proformative.com/resources/sales-consulting-agreement

You might also want to consider a PEO or Professional Employer Organization. Proformative has a free white paper titled:

"PEO: Taking Outsourcing a Step Beyond Pays Off for Small and Mid-Sized Companies:"

https://www.proformative.com/whitepapers/peo-taking-outsourcing-step-beyond-pays-small-mid-sized-companies

Enjoy!

Best... Sarah

Jeff Taylor
Title: CFO
Company: Communications Co.
(CFO, Communications Co.) |

CA Minimum Wage law can be found here: http://www.dir.ca.gov/IWC/IWCarticle4.pdf. Lots of fine print, but if it is an exec position they need to earn at least twice the state minimum wage annually. Look at this link and section 1, sub-section 1, paragraph f. I hate these state docs b/c they are so densely written, but it seems clear enough.

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