What Percentage of My Sales Commission Can My Employer Take?

Commission-based employees rely on their sales commissions for compensation. Employers have to pay the full amount of the earned commission under the employment agreement. However, some commission agreements provide for deductions that can lower the commission. Generally, the contract has to include which deductions the employer can take and when.

If you have questions about how much your employer can take out of your sales commission, talk to an employment lawyer. Wage and hour regulations can depend on state law. To understand sales commission deductions, talk to a local wage and hour lawyer.

Understanding Sales Commission Deductions

Sales commission is a type of employment compensation. Sales commission agreements can take many forms. Some sales representatives get a base salary or hourly wage in addition to a sales commission. Other salespersons get commission only. Commission structures are generally based on a straight percentage of sales. However, other employment agreements can have a flat commission amount or tiered commission payments.

Employers generally have to pay the employees their earned commission. However, written commission agreements can have deductions that reduce the commission-based employee’s compensation. Some deductions are required by law and others are part of the commission agreement.

There are many types of deductions that reduce the commission payment, including:

• Salesperson expenses
• Discounts or incentives to make the sale
• Return of commission for returned products
• Offsets for advance payments
• Clawbacks
• Wage garnishment orders
• Payroll taxes

Employers may also be able to make deductions for losses caused by dishonest actions or gross misconduct, though many states prohibit deductions for ordinary negligence or mistakes.

Legal Limits on Employer Deductions

Depending on state law, employers have limits on what types of deductions they can take from commissioned employees. Generally, employers can take deductions for expenses related to the sales work but not for general business expenses. Employers cannot reduce payments for illegal reasons, like reporting unsafe working conditions.

Deductions cannot be so high that they reduce the worker’s income below the minimum required by minimum wage and hour laws. If the deductions cause compensation to fall below the minimum required for the pay period, the employer must pay at least the minimum wage plus overtime for that period.

Many state labor laws are more protective than federal employment laws. To find out about the legal limits for employer deductions in your state, talk to a local employment attorney.

Mandatory Deductions for Taxes and Wage Garnishment

Most employees have payroll taxes taken out of their paychecks. These deductions go to state and federal benefits, unemployment, and other programs. Federal payroll taxes include Social Security and Medicare. Most employees also have federal income tax taken out of their paychecks.

Some employees have wage garnishment orders from the court that take part of their income. Wage garnishment orders can involve unpaid debts, unpaid taxes, or child support orders. Employers have to make deductions when they get notice of a wage garnishment court order, even when issued from another state. Generally, there are limits to how much income can come out of wage garnishment payments.

Factors Influencing Commission Deductions

Different types of jobs may have different types of commission deductions. Some industries have clawback provisions for fraudulent actions that cause financial loss to the company. Many sales jobs also have clawbacks to take back commissions when sales are canceled or items returned.

For example, a customer buys a computer system for his or her office. The salesperson gets a commission on the sale. The customer comes back two weeks later to return the computer. The employer can take back the commission on the sale, as part of the commission agreement.

Protecting Your Earnings from Excessive Deductions

Having a clear employment contract can help you avoid any confusion about your commission plan. If you earn commission-based pay, your written contract should specify the commission terms, including:

• Commission basis and percentage
• Tiered commission
• Payment terms
• Sales period
• Deductions
• Additional compensation
• Benefits

If you have questions about the pay structure, talk to your employer. Make sure you understand the commission rate to avoid any surprises.

Sharing Sales Commissions With Other Employees

Some jobs involve multiple employees taking part in the sales process. When multiple salespersons are responsible for a sale, their agreement may provide for commission sharing. Workers should understand shared sales commission policies to make sure they get the compensation they earn.

Steps To Take if Your Commission Is Incorrect

Employers have to follow state and federal labor laws, even for sales employees and outside salespersons. The Fair Labor Standards Act (FLSA) provides minimum payment protections for employees. “Outside” sales employees are generally exempt from minimum wage and overtime regardless of earnings, while retail or service establishment employees may be exempt from overtime if their earnings exceed specific thresholds. 

An employment lawyer can explain your legal rights to claim your unpaid commission earnings. For many hour and wage law claims, you can recover unpaid wages and additional compensation. In many cases, your employer will have to pay your legal fees for bringing the labor law claim. For legal advice about non-payment of commissions, talk to a wage and hour law attorney.