November 09, 2012
Employment Law Alert
Author(s): Marjorie S. Fochtman
Beginning on January 1, 2013, all employers must have written commission agreements for California employees who are compensated on a commission basis. California’s AB 1396 was passed and signed into law in 2011 and creates a new Labor Code section 2751. The law applies to all employers who have employees in California who are paid a commission, regardless of whether it represents all or just a portion of the employee’s compensation. The new section 2751 requires that each employee performing work in California and paid on a commission basis receive a written contract that specifies how the commission payments will be calculated and paid.
The new Labor Code section 2751 borrows the definition of commission from Labor Code section 204.1, which defines a commission as “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionally upon the amount or value thereof.” In order for a payment to be considered a commission under this definition, two requirements must be satisfied. First, the employee must be employed principally in selling a product or service. Second, the commission must be “sufficiently related” to the price or the amount of items sold. This “sufficiently related” standard does not require the commission payment be a strict percentage of the employee’s sales. A commission could be based on net profits or some other formula that takes into account the employee’s sales efforts. Thus, even some bonus programs that reward employees for increasing revenues could be considered “commissions” within the section 204.1 definition and thus subject to AB 1396’s requirements.
AB 1396 specifically exempts certain payments from the definition of commission. Short-term productivity bonuses, such as those that are paid to retail clerks, are exempted. Additionally, in September of 2012, the California legislature passed another bill further exempting from commissions, “temporary, variable incentive payments that increase, but do not decrease payment under the written contract.” In adding this additional exemption, the legislature intended to exempt from the definition of commission short-term incentives such as a bonus offered to car salesmen to sell a particular car on a particular day (“$500 to the first person to sell that yellow car we have had on the lot for three months”).
Bonus and profit sharing plans are generally excluded, unless the bonus is based on a fixed percentage of sales or profits. Employers should carefully evaluate whether bonuses and profit sharing plans could fall within the statute’s requirements as California courts have interpreted broadly Labor Code section 204.1’s definition of “commission.”
The new law requires the following:
Employers should also be aware that the expiration date in a commission agreement is invalid under the new law, unless the agreement is immediately replaced by a new agreement or the employee is terminated. Otherwise, the terms of the expired agreement will remain in full force until the agreement is superseded or the employment is terminated.
The law is silent regarding whether electronic signatures are acceptable for the employer’s issuance and the employee’s acknowledgement of receipt and agreement. Electronic signatures are generally accepted in California, so this should not be an exception. Employers that issue commission agreements electronically should ensure there is a method for recording the employee’s receipt of the agreement.
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