California Law Soon To Require Written Contracts For Employees Paid On Commission (AB 1396; Cal. Labor Code § 2751)

On January 1, 2013, all employers with employees in California who are paid by commission will be required to have written contracts with those employees.  This law is a significant departure from the previous law, which only required employers based outside of California to have written contracts with their commissioned employees.  The California Legislature revised the law in response to a federal court decision finding the previous version to be unconstitutional because it treated in-state employers more favorably than their out-of-state counterparts.

Critics of the law have argued that the changes are unnecessary because California employees have worked without mandatory written commission agreements for decades without major incident.  In practice, however, written agreements can protect employers from misunderstandings concerning commission payments.  Therefore, on balance, the law encourages employment best practices.

Employers should take the following steps to comply with the new law:

  • Determine if the new law applies to your company.  The law applies to any employer who has employees working on commission within California, regardless of where the company is physically located.  The law also applies to all employers, irrespective of the size of their workforce.  If the company pays wages—either partially or fully—by commission, then the statute applies.  Employers should also consider whether their incentive payments could qualify as a “commission” under the statute.  While many bonus and profit-sharing schemes do not constitute a “commission,” some may qualify as such. The statute, however, expressly excludes “short-term productivity bonuses such as are paid to retail clerks.”
  • The contract may be concise but must include key terms and be properly maintained.  The contract must be in writing and state how commissions will be computed and paid.  (This is consistent with California Labor Code § 2810.5, effective January 1, 2012, which requires employers to provide written notice of employment terms, including commission rates.)  The parties must sign the agreement, and the employer must give the employee a signed copy.  Additionally, the employer must obtain a signed acknowledgment of receipt of the contract and retain that record.  Notably, even for employers who already use written commission plans, the law may require employers to recirculate existing agreements and obtain written acknowledgments of receipt from their employees.  The law also provides that even if the contract technically expires, if the parties continue to act as they did while the contract was in effect, then its terms continue to apply, at least until a new contract is signed or the relationship terminates.

  • Potential penalties for non-compliance.  While the statute does not set forth specific penalties, an employer risks exposure for allegedly unpaid or late commissions, damages under California's Unfair Competition Law (UCL), or penalties under California’s Private Attorney General Act (PAGA), as well as associated attorneys’ fees.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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