California requires employers to have commission agreements in writing

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.

What counts as a commission?

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.

What does not count as a commission?

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.”

What are the specific requirements?

The new law requires the following:

  • that commission agreements be in writing;
  • that commission agreements set forth the method by which commissions will be computed and earned;
  • that the employer provide the employee with a signed copy of the commission agreement; and
  • that the employer obtain a signed receipt of the agreement from the employee acknowledging both receipt of, and agreement with, the commission program.

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.

Best practices under the new law?

  • Determine if your employees are paid by commission.
  • Create a written commission agreement for all employees who are paid by commission.
  • Set forth the eligibility criteria in the agreement.
  • Clearly define in plain language how commissions are computed.
  • Take special care to clearly define when commissions are “earned” and any conditions required for the commissions to be “earned” (for example, if the customer must keep service for one year before commission is “earned” by the employee).
  • Explain that advances or “draws” of unearned commissions are loans that will be reconciled against later, earned commissions.
  • Explain how sales made by multiple employees will be treated.
  • Address how returns and refunds affect commissions if applicable.
  • Explain how termination of employment affects unearned and unpaid commissions.
  • State that employer has authority to modify plan. (Note: modifications must be in writing, signed by the employer, and the employee must acknowledge receipt and agreement.)
  • Give all commissioned employees a signed copy of the agreement.
  • Have all commissioned employees acknowledge receipt of, and agreement to, the commission plan.
  • Maintain records of the written commission agreements, evidence of issuance to employees, and evidence of employees’ acknowledgement of receipt and agreement.
  • Preserve the records for at least four years after the agreement is superseded or the employee’s employment ends.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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