Commissions, Overtime and Exempt Status of California Employees

Mar 17, 2017 by

Commissions, Overtime  and Exempt Status of California Employees

Employment commissions are defined in the California Labor Code.  Specifically, California Labor Code Section 2751 provides as follow:

(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terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.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.

How is this Code section applied and enforced?


Generally speaking, commissions are earnings based on a percentage of the price of goods or services an employee is involved in selling.  In California, a commission is compensation paid based on the value of the employee’s sale of a good or service. A payment that is discretionary rather than mandatory (like a holiday or year-end bonus) is not a commission.  Discretionary payments cannot be enforced in court.

Written Agreement

First and foremost, if any part of one’s compensation is based on commissions, the employer is required to provide the employee with a written agreement explaining how and when commissions will be paid.  The written agreement will specify how commissions are calculated (such as how large a percentage of the sale one receives and whether that percentage is based on the total purchase price or net company profit). The employer is obligated to obtain written acknowledgement from the employee that the contract explaining commissions was actually received by the employee. Courts consider all of the terms of the written agreement, so it is important to understand their meaning at the time the contract is entered into.


The written agreement spells out when commissions are earned, and owed.  Often times, commissions are earned when a sale is made, but the written agreement could state that the commission is not owed to the employee until the employer receives payment from the customer.  In California, once a commission is earned, regular payday laws apply.

Exempt Employees/Overtime

A California employee whose salary is made up, in part, of commissions can still be eligible to earn overtime pay, if that employee is non-exempt. (If an employee works in the professional, technical, clerical, mechanical, or mercantile industries; earns at least 1 1/2 times the minimum wage and receives at least half of his or her pay from commissions, the employee does not qualify to earn overtime pay.)

California’s laws regarding exempt status differ from federal laws in two important ways.  First, regardless of salary threshold, California requires employees to be “primarily engaged” in exempt duties to qualify as exempt. This means that more than 50% of an employee’s time must be spent engaging in the activities that earn the exemption. (Federal law applies a “separate job duties” test, without the requirement that the employee spend at least 50% of his or her time engaged in exempt activities.) Second, California’s salary threshold is $41,600 per year, which is 40 hours per week, times 52 weeks, times twice the state’s minimum wage.  (Under federal law, the overtime rule exempts employees who earn more than $47,476.)

When applying the salary threshold to California employees, it is important to note that California does not allow employers to include any non-discretionary or commission payments made to the employee when calculating the threshold, unless those payments were actually made in and for the same pay period for which overtime pay is sought. (Federal law allows employers to satisfy up to 10% of the salary threshold with non-discretionary bonuses, incentive payments, and commissions, so long are they are paid at least quarterly.)

As a result of the above, even if a California employer pays an employee enough under the federal standard, it may still not qualify the employee as exempt under California law, which would entitle the employee to receive overtime pay.  Further, California’s minimum wage laws will be changing at the start of every year for the next several years, and since the salary threshold is tied to minimum wage, the salary threshold for exempt employees will change for California employees at the start of each new calendar year.


Applying California law (especially when it diverts from federal law) to determine the amount and timing of commission or overtime payments can be confusing and complicated.  This is why it is best to seek advice from a qualified California employment attorney.


Mr. Belice has been a corporate and real estate transactional attorney since 1998. He has significant legal experience in all aspects of representing privately and publicly held companies. Mr. Belice’s corporate practice includes domestic and international mergers and acquisitions, private placements of equity and debt, venture capital financings, film and entertainment financings, corporate governance, reorganizations, employment equity and compensation arrangements, entity formation and counseling senior company executives on complex legal and compliance issues.

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