Resource
Commission Plan Audit Checklist
Sciborski Forfeiture and § 2751 Compliance
Commission plans are liability generators.
California commission plans create PAGA exposure in three ways: forfeiture of earned commissions for departed employees (Sciborski), failure to include commissions in the regular rate for overtime and premium calculations (Ferra/Alvarado), and failure to maintain a written commission agreement (§ 2751). Each failure is independently actionable — and a single commission plan deficiency can generate derivative exposure across multiple violation categories.
The § 2751 requirement.
Labor Code § 2751 requires that any employment agreement providing for commissions as a method of compensation must be in writing, must set forth the method by which commissions shall be computed and paid, and must be signed by both the employer and the employee. An employer that pays commissions without a compliant written agreement is in violation of § 2751 — regardless of whether the commissions are actually calculated correctly.
01
Section 2751 Written Agreement Requirements
Every commission plan must satisfy § 2751. The written agreement requirement is independent of the substantive commission calculation.
Written agreement exists.
The commission plan must be in writing. Oral agreements, informal understandings, and 'we've always done it this way' arrangements do not satisfy § 2751.
Computation method described.
The agreement must describe how commissions are computed — the formula, rate, or methodology. Vague language like 'commissions will be determined by management' is likely insufficient.
Payment method described.
The agreement must describe when and how commissions are paid — pay period, timing relative to the triggering event, and payment method.
Signed by both parties.
Both the employer (authorized representative) and the employee must sign the agreement. Electronic signatures are valid. A signed acknowledgment of a handbook provision may satisfy this requirement if the acknowledgment specifically references the commission plan.
Copy provided to employee.
The employer must provide a signed copy to the employee. Retain proof of distribution.
Updated when plan changes.
If the commission structure changes (rates, quotas, qualifying events), a new written agreement must be executed. Amendments to the existing agreement are acceptable if they satisfy the signature requirement.
The signature requirement is strictly enforced.
A commission plan distributed in a handbook without an employee signature on the specific plan (or a specific reference to the plan in the acknowledgment) may not satisfy § 2751. The safest approach: a standalone commission agreement signed by both parties, provided to the employee, and updated whenever the plan changes.
02
Forfeiture Analysis (Sciborski)
Under Sciborski v. Pacific Bell Directory (2012) 205 Cal.App.4th 1152, commissions are earned when the employee completes the work entitling them to the commission — not when the employer receives payment or when a post-completion contingency is satisfied.
Car Dealership — Deal Closing vs. Funding
A salesperson closes a deal on March 1. The deal funds (financing finalized) on March 15. The salesperson resigns on March 10. Under the dealership's commission plan, the commission is payable only after funding — and only to 'active employees.' Sciborski permits conditioning the commission on funding — the sale becoming final is a condition about the sale. The exposed term is 'active employees': a forfeiture triggered by the March 10 resignation is a condition about the employee, and the argument — untested in published authority — is that the commission was earned at closing and the departure trigger cannot take it back. Failure to pay generates: § 201/202 (final pay timing), § 203 (waiting time penalties — up to 30 days' wages), § 226 (wage statement failure), and PAGA penalties on each.
03
Departure Scenarios
The forfeiture exposure crystallizes when an employee departs with pending commissions.
strong
Terminated — Pending Deals
Terminated employees must receive all wages, including earned commissions, immediately (§ 201). Where the plan's conditions tied to the sale are satisfied and only a departure trigger stands between the employee and payment, the defensible course is to pay: the departure-trigger forfeiture is the plan term most exposed under Sciborski, and unpaid earned commissions at termination draw § 203 waiting time penalties.
moderate
Voluntary Quit — 72+ Hours Notice
Employees who quit with 72+ hours' notice must receive all wages on their last day (§ 202). Same Sciborski analysis applies — earned commissions must be included in the final paycheck.
weak
Voluntary Quit — No Notice
Employees who quit without 72 hours' notice must receive all wages within 72 hours. The tight timeline makes it difficult to calculate pending commissions — but the obligation exists regardless.
The turnover multiplier.
For a dealership with 20% annual salesperson turnover and 40 salespeople, 8 employees depart per year. If each has 2–3 pending deals, the annual forfeiture exposure is $73,200–$97,600 in commissions alone — plus § 203 penalties of $67,200 and PAGA penalties. This is a systemic, recurring exposure that compounds every year the plan remains uncorrected.
04
Regular Rate Inclusion
Commissions must be included in the regular rate of compensation for overtime and premium calculations. The timing of inclusion — and the calculation methodology — is where errors occur.
Retroactive adjustment required.
When commissions are paid quarterly but regular rate is calculated weekly, the employer must retroactively adjust overtime pay for every week in the quarter when the commission is finally paid. This retroactive adjustment is required by law — it is not optional. Most payroll systems do not automate this adjustment.
05
Common Commission Plan Deficiencies
These deficiency patterns appear in the majority of California commission plans reviewed in litigation.
Non-Curable
Forfeiture-on-Departure
Commission plan conditions payment on active employment through a post-completion event (funding, delivery, retention period). Under Sciborski, this is unlawful forfeiture of earned wages. Every departure triggers exposure.
Non-Curable
No Written Agreement
Commissions paid without a § 2751 compliant written agreement. The violation exists regardless of whether commissions are calculated correctly. Every pay period without a signed agreement is a violation.
Potentially Curable
Commission Excluded from Regular Rate
Commissions not included in the regular rate for OT and premium calculations. Systemic underpayment affecting every OT hour and every premium. Requires payroll system reconfiguration and retroactive adjustment.
Potentially Curable
No Retroactive OT Adjustment
When commissions are paid in a later period, the prior period's OT is not retroactively adjusted. Each unadjusted pay period is a separate overtime underpayment.
Curable
Vague Computation Method
The written agreement describes commissions in general terms but does not specify the exact computation methodology, quota structure, or payment formula. Revise the agreement to include specific terms.
Curable
Missing Employee Signature
The commission plan exists in writing but was never signed by the employee. Obtain signatures immediately. Consider a new plan agreement with updated terms.
06
Industry-Specific Considerations
Commission structures vary significantly by industry. Each creates different exposure patterns.
Key Authorities
Lab. Code § 2751
Written commission agreement requirement
Sciborski v. Pacific Bell Directory (2012) 205 Cal.App.4th 1152
Commissions earned at completion of work
Lab. Code § 201
Final pay — termination (immediate)
Lab. Code § 202
Final pay — voluntary quit (72 hours or last day)
Lab. Code § 203; Pineda v. Bank of America (2010) 50 Cal.4th 1389
Waiting time penalties — up to 30 days' wages; three-year limitations period whether or not wages are also sought
Lab. Code § 204
Pay timing requirements
Ferra v. Loews Hollywood Hotel (2021) 11 Cal.5th 858
Regular rate for premium calculations
Alvarado v. Dart Container (2018) 4 Cal.5th 542
Flat-sum bonus regular rate methodology
Lab. Code § 515.5
Computer professional exemption
IWC Wage Order 7
Mercantile industry — commissioned salesperson exemption
For illustrative and educational purposes only. Commission plan compliance requires industry-specific analysis. Consult counsel for a tailored review.