Compensating commissioned salespeople can be tricky business. Salespeople naturally want to get paid when they close the deal. After all, closing deals is what salespeople live for, and they naturally feel entitled to getting paid when they score a “win” for the team. Also, closing a deal usually signals the end of the salesperson’s involvement with a new account. After the deal is closed, the account is typically passed along to members of the company’s operations staff to provide products or services and then to the company’s finance team to bill and collect.
Most companies would also like to be able to pay commissions to their salespeople at deal closing because it encourages sales team performance. There’s nothing like an immediate reward to motivate your sales staff to close deals. At the same time, however, companies are often hesitant to assume the risk of a new customer not paying their bill when the time comes. Also, some business models may inherently have a significant lag time between deal closing and collections. As a result, companies often look for ways to delay payment of commissions until payment is received from the customer.
Commission Advances
Many companies choose to balance these risks and timing issues by paying their sales staff an advance at the time of deal closing and the remainder of their commissions when the revenue comes in. This accomplishes the goal of providing immediate reward to the sale staff while also addressing the company’s concerns about timing and collection.
But what happens when the new customer doesn’t pay their bills? Or the deal goes south due to unforeseen circumstances? Can the company get its advance back from the salesperson? Most companies would say, “Sure – an advance is essentially a loan and needs to be paid back by the salesperson if the company doesn’t get paid by the customer.”
Of course, it’s not that simple in California.
Defining When Commissions Are “Earned”
Commissions are treated as a form of “wages” by the California Labor Code. Like any other type of wages, commissions cannot be forfeited or reduced once earned. If an employer’s commission agreement hasn’t defined when commissions are “earned,” then the employer runs the risk of violating the Labor Code if it tries to recoup advances already paid to its employees – the employee can argue that the commission was earned when the deal was closed, which makes sense because that’s when the salesperson did their work. However, California law recognizes the parties right to contractually define when commissions are “earned” (with certain limitations, which will be discussed in future blog posts). Therefore, if the company and salesperson agree that commissions aren’t fully “earned” until the company actually receives payment from the customer, then advances paid can usually be recouped from the employee if payment is not received.
For this reason (among other reasons), it’s important for employers to have carefully-drafted commission agreements for their sales staff.
EDGAR LEGAL GROUP 