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Commission Agreements Must Be In Writing

On October 7, 2011, Governor Brown signed AB 1396 which amends Labor Code Section 2751.  Section 2751 currently requires an employer who has no permanent and fixed place of business in the state and who enters into a contract of employment involving commissions as a method of payment with an employee for services to be rendered within the state to put the contract in writing and to set forth the method by which the commissions are required to be computed and paid. An employer who does not comply with those requirements is liable to the employee in a civil action for triple damages.  This statute has been held invalid (see Lett v. Paymentech, Inc. (N.D.Cal. 1999) 81 F.Supp.2d 992) because it applied only to out of state companies.  AB 1396 alters the statute and makes it applicable to all employers doing business in California.  AB 1396 also removes the triple damages clause.

The new law requires:

(a) By January 1, 2013, whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid.
(b) The employer shall give a signed copy of the contract to every employee who is a party thereto and shall obtain a signed receipt for the contract from each employee. In the case of a contract that expires and where the parties nevertheless continue to work under the terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.

Commission wages are compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.  Under the modified statute “Commissions” does not include short-term productivity bonuses such as are paid to retail clerks; and it does not include bonus and profit-sharing plans, unless there has been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed.

There are no penalties associated with a violation of the newly worded statute, but it could be a basis for suit under California’s Labor Code Private Attorney General Act (PAGA).

If you pay your employees a commission, you must have the commission plan reduced to writing by January 1, 2013.  The contract must state the method of calculating the commission and how it is paid.  Employees must also receive a copy of the executed commission agreement.

Commission plans can be simple or complicated, but many employers forget to include provisions in the commission agreement regarding when the commission is earned (versus when it is paid out), what conditions have to be met to earn the commission, and what happens to unpaid and/or unearned commissions when the employment is terminated.  Failure to consider and include such provisions can lead to costly litigation.

If you have a commission plan at your work, review the plan with knowledgeable counsel to ensure the terms are clear and lawful.

The Law Office of Phillip J. Griego
95 South Market Street, Suite 520
San Jose, CA 95113
Tel. 408-293-6341
Original article by Robert E. Nuddleman, former associate of The Law Office of Phillip J. Griego.
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