INDEPENDENT WORKERS & COMMISSION PAY IN CALIFORNIA
By Ward Heinrichs
Some people have asked me if they can pay commissions to California independent contractors? Under California law, the answer is not a simple “yes” or “no.”
First, the definition of Commissions does not include a reference to independent contractors. In fact, the relevant statutes only refer to employees as the type of worker who receives commissions:
Commission wages paid to any person employed by an employer . . . (Labor Code §204.1.)
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 . . . (Labor Code §2751(a).)
Second, California law says that only sales employees can be paid commissions. (Labor Code §2751(c), citing Labor Code §204.1; Keyes Motors, Inc. v. Division of Labor Standards Enforcement (1987) 197 Cal. App. 3d 557.) Still, does that necessarily mean that employers may not pay independent contractors a commission if they want to?
Generally, if a worker qualifies as an independent contractor, California law will not govern how the worker gets paid. Still, most independent contractors will not agree to receive payment via commission. One exception would be attorneys who agree to represent clients on a contingent fee basis, but, when I’ve been asked the question about paying independent contractors a commission, the person asking the question has always referred to sales workers. Can some sales workers be independent contractors who are paid commissions?
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California recently adopted the ABC test as the method to determine which workers are employees and which ones may qualify as independent contractors. (Labor Code §§2775-2787.) Sales people generally work within the usual course of the business for which they work. That means they cannot qualify as independent contractors under the ABC Test. (Labor Code §2775(b)(1)(B).)
However, the California ABC law exempts two types of sales people from the ABC test: 1) direct sales salespersons who qualify under Unemployment Insurance Code §650, and 2) sales persons who sell manufactured housing and otherwise qualify under Health and Safety Code Sections 18000 et seq.
These narrow exemptions do not apply to many sales people, so they are not widely used. Further, employees who qualify for those ABC test exemptions are still subject to the old Borello test, the independent contractor test that existed before California adopted the ABC test.
Besides those two narrow sales classifications, probably no other sales persons can qualify as independent contractors. However, there is a type of sales employee that may appear as if they are independent contractors because some important wage laws do not apply to them. Those employees are called Outside Sales employees.
Outside Sales employees are those that spend more than 50% of their time away from an office selling an employers products or services and/or obtaining orders or contracts for such products or services. They must also be over the age of 18. If an employee meets those requirements as further defined by regulation and case law, then the employer need not pay minimum wage or overtime and need not provide meals or rest periods.
However, many employment laws still apply to outside sales employees, such as: expense reimbursement, commission agreements, sick leave, discrimination & harassment laws, workers compensation, etc.
So, what’s the answer to the question about whether a business can pay independent contractors commission wages: maybe.
Based in San Diego, California the Employment Law Office of Ward Heinrichs represents both employers and employees in almost all areas of labor law. He and his firm litigate cases that have been filed in many different parts of California. Keep up with him at https://bestemploymentattorneysandiego.com/
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