United States: Changing California Commission And Bonus Plans In The Time Of COVID

Seyfarth Synopsis: California employers seeking to mitigate the financial impact of the COVID-19 pandemic may consider adjusting certain pay plans as a way to control costs. Where these adjustments involve commission agreements and bonus plans, it makes cents to invest some time in recalling that phrase coined by Benjamin Franklin: "An investment in knowledge pays the best interest." So here we review a few California peculiarities about commissions and bonuses.

Faithful readers of this blog know that California employers must use written agreements to define how they compute and pay commissions and bonuses based on a percentage of sales or profits. California treats that pay as wages, which cannot be forfeited once they have been earned. In other words, once compensation has been "earned" under the terms of an agreement, it is, in effect, "money in the bank" and must be paid even if the agreement is modified before the compensation is payable. That's why changes to commission and bonus agreements must be prospective rather than retroactive, and cannot reduce "earned" compensation even after a new agreement has been signed.

Consider the following example. Employee Wally Warbucks has a commission agreement with his employer, Cheddar, Inc., providing that Warbucks will earn a 20% commission on sales of Cheddar's widgets. The agreement states that a commission is "earned" when the customer pays the invoice on the sale, and is payable in the pay period after it is earned. On May 1, 2020, Warbucks sells 100 widgets to customer A, who pays for the widgets on June 1, 2020. On June 2, 2020, Warbucks and Cheddar enter into a new commission agreement, providing that the commission on widget sales will now be just 15%. Under this scenario, Warbucks is entitled to a 20% commission on his May 1, 2020 sale to customer A, even though the new agreement went into effect before the commission was payable.

Workplace Solutions. Employers who wish to reduce compensation for employees paid by commissions or bonuses that are based on a fixed percentage of sales or profits should do the following to avoid pitfalls that employers may later find taxing: (1) carefully review the terms of the agreements to be changed; (2) provide employees with reasonable advance notice of their intent to make changes to the agreements; (3) ensure that new agreements clearly spell out all requirements for computation and payment of the commissions and bonuses; (4) require that employees sign off on the new agreements; and (5) ensure that compensation earned under the terms of superseded agreements is paid in accordance with those agreements.

Employers need not buck at the complexities involved with making these changes, but should instead spend time with a Seyfarth attorney to guide them so that their interests will be protected.