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Commission-Only Employment Agreement? Not So Fast.

Hiring a new employee costs the average employer approximately one third to one half more than the salary named in the offer letter. If you’ve been offered or are currently working a position that pays commission with no salary or hourly pay, also known as commission-only, the employer has probably decided it doesn’t want the hassle or expense of employees.

And that’s fine, except when it isn’t.

Commission-only employees are usually independent contractors who are responsible for their own payroll taxes using a W-9 form provided to their employer (by contrast to a W-4 withholding certificate filled out by employees). Independent contractors are also responsible for purchasing their own health insurance and disability benefits. In California, commission-only positions are legitimate if the actual payment when targets are hit constitutes minimum wage or higher; and if the underlying work that is performed is in sales. And that’s where classification can get slippery.

This means that an auto mechanic whose pay is based solely on a percentage of the total repair bill s/he generated, but who is not actually salesperson, has been mischaracterized as a commission-only employee. Keyes Motors, Inc. v. DLSE (1988). Although the mechanic may occasionally bring in a new customer or sell a product to a client, that would be secondary to the main function of his or her position, which is to service vehicles under the control of the employer. “Put simply, a mechanic performs labor, not sales.Keyes.

Ditto for the plumber whose pay is based solely on a percentage of the value of the work performed; or the massage therapist getting paid commission-only per massage; or the garment worker getting paid on a per-piece basis. You get the idea. None of them are accurately classified as commission-only employees, even if they signed an agreement saying they are.

If you’re fine with your arrangement with your employer, I’m not advocating rocking the boat. But if there are other issues going on such as harassment or a wrongful termination, it might be useful to know that mischaracterizing employees as one thing when they’re actually another can have significant financial consequences for the misclassifying employer, like having to pay back payroll taxes[1], paying for hours that an employee worked but was not paid for (because of this commission-only arrangement), waiting time penalties and repeat offender penalties, to name a few.

Commission Agreements Have to Be in Writing. Another useful thing to know is that California requires every commission employment agreement to include a clear description of the method by which commissions will be computed and paid, as well as contain clear descriptions of any amounts the employer plans to deduct from earned commissions. In the absence of a written agreement, courts will consider all payments made as employment wages and order the employer to make things even and pay penalties if appropriate. As a slight aside, the employer probably can’t change the commission structure retroactively unless it’s agreed to in writing by the employee. Here’s the law:


Section 2751 of the Labor Code is amended to read:


(a) Whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid.

(b) The employer shall give a signed copy of the contract to every employee who is a party thereto and shall obtain a signed receipt for the contract from each employee. In the case of a contract that expires and where the parties nevertheless continue to work under the terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.

(c) As used in this section, “commissions” has the meaning set forth in Section 204.1. For purposes of this section only, “commission” does not include any of the following:

(1) Short-term productivity bonuses such as are paid to retail clerks.

(2) Temporary, variable incentive payments that increase, but do not decrease, payment under the written contract.

(3) Bonus and profit-sharing plans, unless there has been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed.

FOOTNOTE: [1]Payroll taxes that come out of employer’s pocket: FICA tax: contributions to Social Security and healthcare programs (Medicare). Employer and employee share this cost. The employer portion is 6.2% for Social Security and 1.45% for Medicare.

Employment questions? Text, call or email me: 925-310-5199;

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