Employers must put all commission agreements in writing by January 1, 2013. By that time, any employee hired to perform work for commissions in California must receive a written contract that includes the method for calculating and paying the commissions.

Passed in 2012, this mandate of AB 1396 applies to employers located inside and outside California. It amended Labor Code Section 2751, which previously applied only to employers with no fixed California location.

Executive Summary: Under a new California law, by January 1, 2013, for any employee whose wages involve commissions, all commission agreements with employees must be in writing, specifically setting forth the method by which commissions are computed and paid.

The new law provides that the written agreement must set forth how commissions are computed, and how they are to be paid.  Additionally, the employer must provide a copy of the agreement to the employee.  The employer must also retain a "receipt" signed by the employee, indicating that the employee was provided a copy of the agreement.

If a contract expires, and the employer and employee continue to operate under the terms of the agreement, the terms "are presumed to remain in full force and effect until the contract is superseded" or the employment is terminated by either the employer or employee.

What Exactly is a "Commission"?

For purposes of the new law, commissions are defined as 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.

Importantly, "commissions" are not any of the following: (a) short-term productivity bonuses such as those paid to retail clerks; or (b) bonus and profit-sharing plans,unless there has been an offer from the employer to pay a fixed percentage of sales or profits as compensation for work to be performed.

One California court has further clarified that wages are considered "commission" if (1) the employees are "involved principally in selling a product or service, not making a product or rendering the service"; and (2) "the amount of their compensation [is] a percent of the price of the product or service."

What If We Don't Have the Commission Agreements in Writing by the Deadline?

Interestingly, the new law replaces an existing law which had long been held invalid by a federal court.  While the new law corrects the existing law, it makes clear that the penalty provision is removed.  However, this removal makes it unclear what the repercussions are for violating the new law.

Employees may use California's blanket Unfair Competition Law, which allows any person (i.e. an employee) to sue for a violation of almost any law.  An employee may also attempt to sue a current or former employer as a private attorney general for enforcement of the new law.

Employers' Bottom Line

Although the new law does not provide any clear penalty for failing to reduce commission agreements to writing by the January 1, 2013 deadline, the most prudent course of action is for employers to begin, in the near future, to memorialize in writing all commission agreements they have with employees.  Employers who already have an understood commission plan in place with employees should consider reviewing the plan with knowledgeable and experienced counsel to ensure compliance with the new and existing law prior to formalizing the plan in writing.