California Commission Laws: Employees vs. Independent Contractors

employees get certain protections when they get commissions that independent contractors would not get, assuming that they also get paid commissions. Welcome to Big Blend Radio's California Employment Law Podcast featuring San Diego attorney Ward Heinrichs. So everyone, we want to know today, do independent contractors get to receive commission wages? This is something Ward and I got into the weeds on in last month's episode, all about commission and sales.

And then it was like, well, what about the independent contractors? And then, of course, we get into who is an independent contractor versus an employee. So Ward, this is a fun topic. Well, you know, when I started writing about it, I didn't really realize how complicated it was.

So, you know, I spent some time really thinking about it and getting an angle on it. And so here we go. Okay. All right.

Should we just start at the beginning of what is the ABC test, you know, an independent contractor versus a sales employee. Yeah, an independent contractor under AB5, which is now codified in the labor code, is someone who does not get the benefit of all the labor code. I mean, of course, some of the labor code might apply to them, but they're not an employee and they don't have to be taken care of the way an employee has to be taken care of under at least California labor code law.

Let me give you an example, like attorneys. Most attorneys are independent contractors. When I get a new client, I'm not working for anyone but my client, and I have several, many clients, and that makes me an independent contractor with my own business, and there's clear exceptions under the AB5 law that allows attorneys to work that way. Yeah, because sometimes attorneys, if they go to court for someone, right, then if they win the case, that's how they profit?

Or is that wrong? Well, it depends. Yes. Where you see that mostly is in personal injury and sometimes, but also in labor code violations at where an attorney will say, hey, look, I'll represent you and you don't have to pay me a dime.

But assuming we win and you know, they're betting that we're going to win. That's why they take the case. I get a percentage of what you get. Okay.

So that's kind of a commission. Yes. I think it does fit the definition of commission under the labor code. Now, the labor code is a little complicated because it makes this issue a little complicated, put it that way, because it indicates pretty clearly that only can be paid commissions.

Now, I dealt with that in the article and I said, well, you know, truly independent contractors probably can because there's nothing in the labor code preventing them from doing it if they want to. But it's just not done very often. And then I gave the example of, well, you know, attorneys do do that kind of thing. And I would call that, I think that's the same thing as commission.

I mean, you can think about other salespeople who probably are independent, like they sell yachts and they're not going to sell too many. But when they sell that one, it's a big check that's being cut and they get a percentage of that. What about realtors, like brokers, like insurance brokers? there are under AB5, there are exemptions for brokers, certain types of brokers anyway.

So they would be independent. I would say most of the time, I'm not going to say all the time. And if they get a percentage, yes, I think that would be a commission to an independent contractor. I think you're right on that.

So in a way, you are a salesperson as an attorney because you have to sell the judge and the jury. Like, so there's sales in every business. Everything in life. Nothing happens in life without a sale being made or some kind of trade or somebody selling something that makes the wheels go around in the world.

I 100% agree with that. But I will say that attorneys are considered salespeople. I think the definition is probably a little more narrow and doesn't encompass attorneys. I know.

But if you apply your broad definition, everyone does some sales for sure. Yes. Sales is such an important thing. So I'm passionate about it because it's had such a bad rap over the years about the snake oil salesman and all of that.

And it is wrong because it's really solving a problem over something that you believe in. I admire a good salesperson regardless of whether they love the product or not. Because I just think that skill is pretty amazing. It's matchmaking.

Anyway. Oh, so wait a minute. If you get to be as an attorney an independent contractor and then have sales be deemed okay as commissions what happens to people that run a business that is kind of run on sales I mean everybody like a solo person runs a business like a matchmaker That a good question here And they match people up And if it's successful, they make a sale. But it's their own company.

So just like an attorney, it's your own company. So they don't get to be the attorney status. That's a little unfair. I guess not.

They don't have a license with the state. See, we're back to the independent contractor laws. And really, that's where the weeds come in. The other thing I want to point out about attorneys, not all attorneys are independent contractors.

There are attorneys who work for firms and they're actually employees. And any business who has independent contractors can say, I don't want you to be independent contractors anymore, assuming it's legal. You know, that you legally qualify these people as independent contractors. I'm going to pay you as an employee.

You're allowed to. Just to let you know. Okay. That's right.

That's right. We all saw, you know, L.A. Law and Boston Legal.

Boston Legal, yeah. That was that firm. Even if they made partner, now that changes it. As long as you're working for the firm, you're going to be an employee.

Now, partners, you know, partners have a different relationship with themselves. They're, you know, partners were going to revenue share, et cetera, et cetera. But that's really talking about the assets that come in. What they do for the firm would, in my opinion, would definitely be employment.

They're working on the business of the firm. And maybe they're administratively exempt, possibly. There could be exemptions, but they're not independent contractors. Well, I got a show for next month.

So the next one, I would like to talk about how employees also have a share in the business, which is very interesting. Going back into independent contractors. So it's not a simple yes or no. So let's go into the definition in your article.

and everyone, as always, Ward's link to his article is in the episode notes, as is his website, bestemploymentattorneysandiego.com and his magazine and the podcast. So everyone always look in the episode notes. But explain the commissions because you talk about that at the start of the article.

You say, first, the definition of commissions does not include a reference to independent contractors. So let's just say who gets a commission, where and when. Yeah. There's a statutory scheme about all that.

And that's why I cited that. I wanted to say, hey, the statutes don't recognize independent contractors as getting commissions. And like I said earlier, that doesn't prevent independent contractors from getting a commission. I just don't think it happens very often, but we've pointed out some situations where it really might.

But the code really talks about employees. It names employees only as getting commissions. And so what we're really talking about is employees get certain protections when they get commissions that independent contractors would not get, assuming that they also get paid commissions. And that the protection really revolves around certain things like they have to have a written agreement that's independent of any other employment agreement about commissions that explains the commissions.

Okay. And so there's certain protections out there for them, for employees who are paid commissions, clearly. Also, the case law only talks about employees being able to get commissions, but they have to be sales employees. And so you can't pay an employee a commission if they're not selling.

There's a case called Keys Motors. And that really, that was like a seminal case on who gets commissions and who doesn't. Which employees get commissions and who doesn't. It was a repair shop.

Let's put it that way. That's probably the easiest way to explain it. And they would, of course, pay the sales team to sell repairs to the cars. Okay.

You know, so you're saying, come on in. You know, we can do this for you. And they have salespeople doing this. And they paid them commissions, but they also paid the mechanics commissions, too.

And they said, hey, look, you know, they're selling. You know, they say, hey, we want to upgrade. And it wasn't really about sales. They're saying these type of people are related to the sales, really what their argument was.

And they get to pay commissions. They get to get commissions, too. And the Supreme Court in California said, nope, there's no way. They do some maybe incidental sales where they try it, where they say, hey, you know, we were talking, you know, the salespeople talk to you about this, but this is what really needs to happen or you need to do this little extra thing.

So they might do that. But by and large, they're working on the car. And if they work on the car, they cannot be paid a commission. Wow.

This is fascinating because there is a protection for the consumer from that. It a big protection for the consumer because if you think about it right Yeah When you call tech support for something and all of a sudden all they trying to do is upsell you and you go like this is not what my plan was because I been through this so many times And this is the truth. They will try and upgrade you to something because they weren't fulfilling their promise, and they use it as a way to upsell you.

And so if a tech person that's supposed to fix something, they upsell you. Think about how many times that happens. Okay, you go through the drive-through. Do you want a big gulp with that?

You know how you're taught to upsell all the time. Sure, sure, sure, sure. Companies do that. That's interesting.

On tech support, there may be a gray area there because maybe they're really salespeople and they're not really tech people. Exactly, exactly. And they're in a different country. So maybe they could be paid a commission.

But if they're truly tech people and they only do a little upselling, then I would say, no, they can't be paid a commission. Right, right. Same with the person in the line for McDonald's. You know, you're in your car, you're in the line, you want to pick up your stuff.

And they go, hey, you go, I want this. And they go, well, if you, for another buck, we'll give you three Big Macs. You know, if they do something like that, yeah, they're doing a little sales. But most of the time, they're taking care of the food.

So, yeah. Kind of a weird thing because then bonuses come in. Like they have contests among employees and all of that. Bonuses aren't, you know, if you structure it correctly, and that could be a problem.

You might not structure it correctly and it may end up being commissioned. Unbeknownst to you, you thought it was a bonus. And then you might get in trouble with the labor commissioner because you're paying non-sales person commissions. And I won't get into why that's a problem, but believe me, it can be a big problem.

Oh, we got another show. Yeah, probably do. Ding, ding. We're just, we're doing, like, we got two.

Okay, so at the same time, like a waitress could say, hey, this is on special. That is still a little bit of a sales thing because they want to get that food out the door. You know what I mean? But that's kind of what is in your job description, I would believe.

That is a normal thing to do. That's part of your, this is what we have on the menu. Well, but if they were spending most of their time upselling, then I think they probably are sales. And even though they might serve food too, because now we're reversing it.

saying, I'm really selling all the time and I do happen to pour a little coffee every once in a while, then maybe they could get a commission. Okay. Yeah. What we see normally is they're waiting on you.

They're giving you that service. Yeah. You tip them for that and they might do a little upselling. And so they wouldn't be able to get a commission.

Well, yes. The Supreme Court would say if you pay them commission, then there are certain things that have to happen with their pay that you probably don't want to do. It's going to cost the employer more money is what it ends up being. So you've got to be careful about that.

And if there's a class action, oh, man, it could be worth lots of money. My gosh. And at the same time, you think about like, go to the doctor. Hey, I came in because I got a little fracture.

You need a whole arm because we've got this static one and we're going to give you that. See, but that can happen. You know, come on now. So it's, you know, because look, oh, we have this new drug and they get a kickback kind of thing.

Well, and that does happen. I don't know about the legalities of upselling medical devices, but assuming that it is legal. Yes, you see that in a doctor's office. But in a doctor's office when the sales rep brought everybody lunch, nurses, doctors, everybody.

And it's a normal thing. Every Wednesday, this guy comes in and buys them lunch. Come on. That's a schmoozing up.

And then what do you think is going to happen with your, you know, here, we got a new drug. Don't know if you really need it, but try it. I get free lunch on Wednesdays. Wow.

That's a whole other way. You know, emphasize, we started talking about bonuses a little bit and that a bonus structured properly would not be considered a commission. And then you don't run into the problem of paying someone who really isn't allowed to get a commission, getting a commission. And again, that leads to lots of wage and hour potential issues.

So the thing, too, you know, it's there are people who have a business of selling things just, you know, I can sell this, I can sell that. And, you know, and even in the digital space, would that be considered an independent contractor? Yeah, I see what you're saying. It's possible that certain types of salespeople could fall under an exemption of AB5.

And so if they fall, AB5 normally says, hey, if you're selling, you're an employee. So we're getting on the employee issue again, because you're doing work in the usual course of the business. Selling is part of the business. In fact, you could even say maybe it's the most important part of the business.

It's really important. So most of those types of people are going to be employees because they do work in the usual course There are exemptions though for certain employees so that they would fall outside of the ABC test AB5 ABC test And then maybe assuming that true then they would be independent contractors who could be paid commissions as independent contractors. Now, that was the way this started. That's the question.

Can they? Sure. There are examples where, and we've come up with some, but there's specific ones in the ABC test that are allowed to be independent contractors, and they, of course, could get commissions. Okay, and then also the one thing that's really specific is, well, not specific, we need to cover this, is if you're an outside salesperson, and we got into that a little bit last month too because that is one of those, that's where this whole started from actually was if you're outside.

When you first asked me about this, I'll bet you were thinking of outside salespeople, which is much more common than the exemptions of the ABC test, It's much more common than other independent contractors working on commissions. The outside salesperson is someone who's really, they're an employee, but they're spending most of their time away and they kind of look like they're independent and they're acting very independently. And so I'm thinking this is what you heard and that's why you brought this up.

They look a lot like independent contractors, but they're not. They are employees. There's just that they're exempt from very important parts of the labor code. Okay.

They're exempt from it. But then some of them also have like different kind of expense accounts. Right. And what happens if you like take a client out for lunch?

Who pays for that? Well, as an employee, the company would be required to pay for it. Now, you know, how how's that really happen where the rubber meets the road day to day? You know, sometimes you whip out your credit card.

Maybe it's not picked up. Who knows? Maybe you need to fill out a form and say, hey, I did this for the company. You know, you need to reimburse me and it doesn't happen because you don't fill out the form.

You know, so there's all sorts of, you know, weird little things that might happen. But yes, if you're working for the company as an employee, then any expense you pay out of pocket that helps the company, you should get that should be reimbursed. The law requires that it's reimbursed. Going back to a couple interviews ago, we talked about employees being outside of the area, right?

So what if it's a Nevada company and the employee is in California with a client and then buys them lunch, right? And then the company in Nevada says, we disagree that you should have taken them to lunch. You have to pay for it. Isn't that illegal?

Or do they have to go by California law for something like that? Well, you said we disagree. I think probably what you meant is under Nevada law, we don't have to pay you for that. Is that what you meant?

Yeah. Like we decided that you took this client out for lunch and we disagree you didn't need to to make the sale. Oh, you see, that could happen in California, too, with a California employer and employee. We just don't think that you should have done that.

That's not something we're going to cover. And then you'd have to fight out about whether that was an authorized type of thing. Now, that's a little different. But I think the way California law would look at it was whether it's authorized or not is promoting your business.

You better reimburse them. If if you disagree with their decision to do that, then you have the right to punish them. So California usually takes that position in most situations. I'm pretty sure it wouldn't deal with it that way as well.

Now, the Nevada thing, I think basically it's the same thing. But because the employee is working in California, California labor law will apply. And then they can say, no, you've got to reimburse me. You can punish me if you want, but you've got to reimburse me.

Now, here's another spinoff of that, though. What if Nevada law says you don't have to reimburse that kind of expense? The problem there is you said the employee is working in California. So, again, California law should apply.

Wow. So everybody take track of because outside salespeople cross borders and that's part of this conversation as well. I don't know. But yeah, I'm sure, especially if they're close to a border, I can't imagine they wouldn't sell across the border one way or the other.

And it could be more complicated. Well, it would be more complicated. Put it that way. Definitely.

It's an interesting thing. So everyone, Ward's information, his website and his article are all linked in the episode notes. And we always have fun going into the weeds. And next month, we probably will do it again.

So thanks. Thanks, Ward. You're welcome. My pleasure.

Thank you for listening to Big Blend Radio's California Employment Law Podcast with San Diego attorney Ward Heinrichs. Keep up with Ward at bestemploymentattorneysandiego.com or follow him on LinkedIn, Facebook, and Twitter. You can also subscribe to Big Blend Radio at bigblendradio.

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