Sales Compensation in California: How To Draft Effective, Legally Sound Sales Commission Agreements Tuesday, January 25, 2011 Presented by the Employer Resource Institute © 2011 Employer Resource Institute. All rights reserved. These materials may not be reproduced in part or in whole by any process without written permission.

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© 2011 Employer Resource Institute. All Rights Reserved About Our Speakers Allen M. Kato, Esq., is an attorney in the San Francisco office of law firm Fenwick & West, LLP. His practice concentrates exclusively on representing management in wage and hour, equal employment opportunity, unfair competition and trade secret matters, and privacy matters; and litigating individual and class action wage and hour, wrongful discharge, employment discrimination, and unfair competition matters before courts and agencies. He also trains managers and HR professionals on a regular basis.

© 2011 Employer Resource Institute. All Rights Reserved About Our Speakers Saundra L. Riley, Esq. is an attorney in the Mountain View office of Fenwick & West, LLP. In her employment litigation practice, Riley defends employers against claims for discrimination, harassment, and retaliation; wage and hour and California Labor Code violations; unfair competition and trade secret violations; breach of contract; and many other claims in state and federal court. In her employment counseling practice, Riley advises employers about trade secret protection, wage and hour issues, leaves of absences, company handbooks and policies, employee performance management and terminations, and many other personnel issues. She also regularly provides training programs on various employment law topics, including harassment prevention, leaves of absence, conducting investigations, and managing within the law.

Sales Commission Agreements That Legally Hold Up How to Draft Legally Sound Sales Commission Agreements Presented for: Employer Resource Institute January 25, 2011 Allen Kato Saundra Riley

OVERVIEW n What is a sales commission n When is a commission “earned” n When may an employer modify sales commission terms n How should employers treat commissions upon termination n When are sales employees exempt from overtime

“COMMISSIONS” DEFINED n California definition  Amount calculated as percentage of revenue from sale of product or services n Federal definition  Work for retail or service establishment  Receive a flat percentage on each dollar of sale n Significance of difference n Compare salary plus commission or bonus

VESTING OF COMMISSION n When is commission deemed “earned”  Employer afforded significant latitude to define conditions – Must be clear – Must be tied to employee’s actual job duties – Must be done in advance, preferably in writing signed by employee

VESTING OF COMMISSION n Compare draws or advances  Reconciliation  Recoverable n Explain what is supposed to happen if a sale is canceled or the terms need to be re-negotiated

CHANGING THE VESTING EVENT n California law on plan changes following a windfall transaction  Procuring cause of sale  Covenant of good faith and fair dealing n Federal case law

REQUIREMENTS UPON TERMINATION OF EMPLOYMENT n Payment of commissions upon termination  Earned commissions payable upon termination and may not be forfeited  If not calculable at time of termination, commissions must be paid as soon as amount ascertainable  Employee terminates  Employer terminates

WHEN COURTS MAY RE-WRITE THE PARTIES’ AGREEMENT n Even if contract clear on its face and can’t be clearer n Legal doctrine of unconscionability allows court to re-write the contract  Must be procedural unconscionability  Must be substantive unconscionability – Provision so one-sided as to “shock the conscience”

EXEMPTION FROM MINIMUM WAGE AND OVERTIME n Commission exemption  California exemption for inside sales – Total earnings must exceed 1-1/2 times minimum wage – More than half of employee’s compensation must be commissions

EXEMPTION FROM MINIMUM WAGE AND OVERTIME  Federal commission (section 7(i)) exemption) – Must be retail or service establishment >75% or more of sales of goods or services must be from sales that are not for resale (i.e., retail, not commercial) >Sales are recognized as “retail” in industry – Employee’s regular rate of pay must exceed 1-1/2 times minimum wage for every hour worked – More than half of total earnings must consist of commissions

EXEMPTION FROM MINIMUM WAGE AND OVERTIME n Outside sales exemption  Customarily and regularly works more than half the working time away from “employer’s place of business” selling products, services or use of facilities  “Employer’s place of business” may include employee’s residence use to make telephone calls n If not exempt, then must pay minimum wage and overtime pay

COMPUTING OVERTIME ON COMMMISSION n Computing overtime on commissions  Compute the regular rate by dividing total earnings for week (including earnings during overtime hours) by total hours worked. For each overtime hour, pay ½ regular rate for hours requiring 1-1/2 and additional full rate for hours requiring double time  Use a commission rate as the regular rate and pay 1-1/2 or double time for overtime hours

DO’S AND DON’TS Avoiding Common Mistakes and Pitfalls n Do call “commission” only compensation that is a percentage of sales n Do clearly state the terms and conditions for earning n Do clearly state the terms and conditions for a draw or advance n Do not take away a vested commission

DO’S AND DON’TS Avoiding Common Mistakes and Pitfalls n Do consider and lawfully implement a windfall provision n Do pay all commissions earned upon termination n Do have a job description that defines the salesperson’s duties n Do ensure that an inside salesperson’s commissions exceed 50% of wages for each workweek

DO’S AND DON’TS Avoiding Common Mistakes and Pitfalls n Do ensure that an outside salesperson works over half the time away from the employer’s place of business n Do properly compute overtime on all wages, including sales commissions

QUESTIONS? n THANK YOU!

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