Tag Archives: Payment timing

Effective January 1, 2013: California’s New Compensation Law

On January 1, 2013, California’s revised Labor Code §2751 goes into effect. The code sets forth the requirements that companies must follow in communicating commission plans to employees who are in California. Interpreted conservatively, a commission is any incentive based on sales performance. The code states that the plan must be in writing, and it must explain how commissions are calculated and when they are to be paid. If a plan expires before a new plan is in place, the terms of the existing plan remain in effect until the plan is superseded or employment is terminated.

In order for the plan to take effect, it must be signed by the employer, and the employer must provide a signed copy to the employee. In addition, the employee must sign an acknowledgement of receipt of the plan. Of course, the employee has the option to refuse to sign the new plan, in which case the employer can terminate employment, stop paying any commission, or continue employment under the old agreement. Employer and employee signatures can be electronic. Although not specified in the code, it is recommended that electronic signatures comply with California’s Uniform Electronic Transaction Act (UETA).

Although the code does not specify penalties for noncompliance, legal experts see the terms as favorable for plaintiff lawyers. It is possible that failing to abide by the code could be subject to the penalties specified in California’s Private Attorneys General Act (PAGA). Those fines are $100 per employee per pay period for the initial violation, and $200 per employee per pay period for subsequent violations. In addition, the court could place the burden on the employer to prove the terms of the contract, otherwise it will presume the employee’s commission calculations are correct.

The commission plan document should answer the following questions:

  • When does the plan expire? If no specific date is given, it is recommended that you include language stating that the contract does not expire unless expressly advised by the employer.
  • To whom does the plan apply?
  • How is the commission calculated?
  • How and when is the commission classified as being earned? You should define the time of earning as late in the sales cycle as possible, in order to allow for ample time to calculate and disburse the payment.
  • When is the commission to be paid? It is recommended to follow California’s Labor Code Section 204, which states that wages earned between the 1st and 15th of the month must be paid between the 16th and 26th of that month. Wages earned between the 16th and last day of the month must be paid between the 1st and 10th of the following month.
  • Are any amounts paid considered advances until certain conditions are satisfied (i.e. implementation for a software sale)? If so, it should be clear that you are recovering an advance on future earnings, not a commission that has already been earned. The circumstances under which  advances can be recovered should be detailed in the document.
  • What happens to unpaid commissions when employment is terminated? Labor code sections 201-203 could apply, which state that earned wages must be paid on the last day of employment for an involuntary termination or for a voluntary resignation with more than 72 hours’ notice. For a voluntary resignation with less than 72 hours’ notice, earned wages must be paid within 72 hours of the last day of employment.
  • Does the employee forfeit any commission upon termination? It is recommended that the document distinguish between voluntary and involuntary termination. For voluntary resignations, it is likely that the provisions of the plan are enforceable. For involuntary terminations, the provisions of the plan could be more problematic, especially if it could be perceived that the employer  terminated employment in order to avoid paying commissions. Either way, it should not be classified as a “forfeiture”. Instead, legal experts recommend stating that continued employment is a condition to earning the incentive pay.

We at The Cygnal Group are experts in sales compensation plan design; we are not attorneys. We recommend that you consult legal counsel to ensure your sales compensation plans comply with California Labor Code §2751 and all other applicable laws.

Primary Source: “Preparing for California’s New Sales Compensation Law”; a WorldatWork webinar presented by David Cichelli of the Alexander Group and Anne Brafford of Morgan, Lewis & Bockius LLP; September 12, 2012. The webinar can be found here and is available to members and nonmembers of WorldatWork.

Two US states rule commissions are earned when an order is obtained…

…at least for terminated employees.

A well-written sales compensation plan document clearly defines when the commission* is officially “earned,” and this may or may not be at the same time that it is paid. Many companies will pay some or all of the commission for a sale following the booking of the order, but reserve the right to reverse sales credit and payment if the order is cancelled, the product is returned, or the sales value is not collected from the customer within a certain timeframe.

Typical “triggers” for payment include:

  • Booking/Order: The customer has agreed to purchase a specific product or service at a specific time for a specific price with specific terms, all documented in writing (e.g., booking)
  • Shipment/Work completed: The product is shipped from the warehouse, or the service is delivered and accepted by the customer
  • Revenue: Revenue for the sale is recognized in the company’s account in system (which may be triggered by shipment or service delivery as well)
  • Cash: Some or all of the payment for the sale is received.

In the case where some or all of the commission is withheld until the company receives payment from the customer, some states (Illinois and Maryland) are beginning to adopt what is called “substantial procurement” doctrine, recognizing the right of sales people to be paid commission for booking a sale, even if their plan document states that payment is not earned or made until cash is received.

Despite this clearly defined “trigger” for earning and payment in the plan document, former employees in Illinois and Maryland can now argue otherwise. Their argument is rooted in the significant investment of time and effort on their part culminating in the successful close of the sale. They argue that a booked order “substantially procured” the commission because they (1) were able to convince the customer to agree to the sale, (2) processed the order, and (3) knew the company was prepared to ship or deliver the product or service to the customer.

In today’s economy, with companies struggling to maintain their cash flow, sales reps are not typically in the business of securing payment, leaving this task to their friends in accounts receivable.

Bottom line: In at least two states in the US, your sales people have the right to their commission payment if they obtained the order, regardless of the wording of your sales compensation plan document. Thus far, the practical implications have extended only to terminated employees. Watch for similar actions in other states, and for sales people making the claim that payments may not be withheld until cash is received if their job is done once the order is obtained.

For more details see the article on the SHRM web site by Joan Deschenaux (SHRM Senior Legal Editor), visible only to SHRM members.

*To date, this issue has arisen only with true commission plans (communicating compensation as a percent of the value of what is sold). However, the principles apply and the issue may shortly arise with other forms of sales compensation including quota-based incentives or bonus-type plans.

At what point should sales people be paid?

First, there are two different “trigger points” in common use in sales compensation plans: sales crediting and payment. The sales crediting trigger is the moment at which a sales person receives credit against their goal or quota, which may allow them to move to a higher payment tier. The payment trigger is the moment at which the compensation for the sales event becomes payable to the sales person (though payment will not be delivered until the next processing period, typically at month- or quarter-end). And, to be complete, there may also be an earnings trigger – the payment can actually be an advance against future earnings.

For example, in large ticket software sales a comp plan may stipulate that

Credit trigger: Sales credit is given when the order is booked (deal is signed), relieving quota and moving the sales person up in the tiers towards a higher payout rate

Payment trigger: 50% of the compensation value of the deal is paid following signing, and 50% is paid following payment of the first invoice

Earnings trigger: Compensation is earned only when cash is collected and all payments in advance of this are draws against these future earnings (which gives the company certain rights to reverse payment/sales credit in case of cancellation or non-payment by the customer)

For the purposes of this discussion, we’ll assume that the most typical arrangement is in place regarding the three triggers above, which is that sales credit and payment are triggered together at the same time, and that earnings are always triggered at cash collection to allow for charge-backs as needed.

The four most usual crediting and payment triggers are:

Order intake (/booking)

Sales job: Obtain new customer acquisition, new business

Typical in: Larger companies with dedicated new business roles, stable processes, robust deal review; long term contract sales

Product shipped / service delivered

Sales job: Book orders from new or existing customers that result in delivered value

Typical in: Many businesses – this is the most typical sales credit/payment trigger

Revenue recognized

Sales job: Book orders that result in recognized revenue in the measurement period (e.g., year)

Typical in: Many businesses since it’s the same as the prior category in most cases; for software, revenue recognition rules can make the timing of this a bit tricky, and recognized revenue is a common measure/distinction for services sales and account management roles

Cash received

Sales job: Sell, and ensure fulfillment and collection

Typical in: Earlier stage businesses where funding the commission requires the cash; businesses selling to markets with colleciton issues; long term contract sales with a preference for up-front payment

The principle is that you should pay the sales person soon after two conditions are met:

  1. Their job is substantially “done” and you’d like them to move their focus off of the old sale and put most of their energy into new opportunities, and
  2. You know what the sales is worth, within about 10% (this may mean you can’t fully pay for rate-table sales, like a rate for hourly work with no commitment to a specific number of hours, until a usage rate is established or the invoices are generated).

Relevant to this discussion, but a subject worthy of separate treatment is the issue of the “annuity tail” that may grow and attach itself to your comp plans if you pay based on invoice for long-term contracts. For several posts addressing different aspects of this problem, see this link.