commission only employeesWe are considering hiring a sales executive on a pure commission basis—that is, paying only sales commissions (plus stock options), provided this is legal. Are there any legal obstacles? Please note that the employee is a California resident.

Core Legal Issue: California Minimum Wage and Commission-Based Pay

In California, employers must ensure that all non-exempt employees are compensated at least at the statutory minimum wage. Even under a pure commission structure, if the employee's actual commission earnings fall below the hourly equivalent of the minimum wage, the employer must make up the difference. Therefore,"pure commission" does not exempt the employer from the obligation to pay minimum wage, unless the employee qualifies for exempt status.

Determining Exempt Status: Administrative, Professional, or Executive Duties

If a sales executive is classified as an exempt employee, minimum wage and overtime rules do not apply. However, exempt status requires meeting strict conditions: primary duties must be managerial, administrative, or professional, and annual salary must not be below California's minimum threshold (approximately$67,000 per yearin 2026, adjusted for inflation). If paid solely by commission and actual annual earnings fall below this threshold, exemption is not available, and the employer faces risks of back pay, penalties, and litigation.

Written Requirements for Commission Agreements and Definition of "Percentage of Sales"

California labor law requires that commission agreements beclearly written, specifying the commission calculation method, payment period, and termination clauses. If a "percentage of sales" is agreed upon, the scope of "sales" (e.g., net sales, collections) must be clearly defined to avoid ambiguity. Additionally, stock options do not constitute "wages" or "commissions" and cannot be used to satisfy minimum wage or exempt salary requirements.

Other Potential Risks: Independent Contractor vs. Employee

When attracting talent on a pure commission basis, companies sometimes mistakenly treat employees as independent contractors. However, California uses the "ABC test" to strictly distinguish employees from independent contractors. If the sales executive is subject to company control, performs work within the company's core business, and does not operate independently, they are likely to be deemed an employee, thus subject to the labor laws above. Misclassification will lead to back taxes, penalties, and retroactive employee benefits.

Compliance of Stock Options

Stock options as an incentive are legal in themselves, but must comply with securities and tax laws. If the employee is not a U.S. citizen or resident, tax withholding issues must also be considered. Furthermore, option grants should not be viewed as a substitute for wages; otherwise, "wage payment" disputes may arise.

Conclusion and Recommendations

In summary, hiring a sales executive in California on a pure commission plus stock options basis,is not absolutely illegal, but there are significant compliance risks. The key depends on:

  • Whether the position meets exemption criteria (duties and salary threshold);
  • Whether the commission agreement is written and terms are clear;
  • Whether actual earnings are ensured to be no less than minimum wage (if non-exempt);
  • Whether to avoid misclassification as an independent contractor.

It is recommended to consult a California labor law attorney before implementation, reviewing the specific job description, compensation structure, and contract terms to reduce legal risks. This analysis is based on general legal principles and does not constitute formal legal advice.