Does Your Business Pay Commissions To Employees In California? Get Ready To Put It In Writing!

by Sayema Hameed

Employers who pay commissions to employees in California must comply with the new California law, AB 1396.  Recently signed into law by Governor Jerry Brown, AB 1396 amends California Labor Code Section 2751 to require all employers who pay commissions to employees to enter into written commission contracts with those employees.  Employers must comply with this law by January 1, 2013.

The written commission contract must explain the method by which commissions are computed and paid.    In addition, employers must also give a copy of the signed contract to each employee and obtain a signed receipt for the contract from each employee.

In the event that a commission contract expires but the parties continue to work under the terms of the expired contract, the new law states that “the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.”  This means that the terms of an expired commission contract will continue to apply (and employers will have to pay commissions as described in the expired contract) until the parties sign a new contract or the employment is terminated.

Under the new law, “commissions” has the same meaning set forth in Labor Code Section 204.1, which states: “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.”

Notably, the new law explicitly states that “commissions” does not include “short-term productivity bonuses such as are paid to retail clerks,” nor does it include “bonus and profit-sharing plans,” unless the employer offers to pay a fixed percentage of sales or profits as compensation.

Employers should start preparing for the new legal requirements in AB 1396 now.  Employers should prepare written contracts for all their commissioned employees that complies with the new law.  Remember that the contracts should detail how commissions are earned, calculated and paid, and employees must receive copy of the signed contract and provide a receipt.

Employers should also be prepared to deal with employees whose existing commission contracts expire on or after January 1, 2013.  Employers would be wise to prepare new agreements for those employees with expiring commission agreements; otherwise, the terms of the expired contracts will continue to apply.