Do you have any employees that are paid on a commission basis? If so, do you have a written contract setting forth the terms and conditions by which commissions will be earned and paid? Has the contract been signed by the employee and has the employee been given a copy? If you haven’t taken care of these things, you should; what was already a prudent business practice has now become a law, a law which requires compliance by January 1, 2013.
It all started with Lett v. Paymentech, Inc. (N.D. Cal., 1999) 81 F.Supp.2d 992. In that case, the court held that certain sections of AB 836, which were embodied in Labor Code § 2751, were unconstitutional. The sections in question required out-of-state employers who paid California employees through commissions to provide a written employment contract setting forth the method by which commissions would be computed and paid. AB 836 also provided for a treble damages penalty against an employer who failed to provide such a contract. Because the statute applied unequally to out-of-state employers in favor of in-state employers, the court held that the bill violated the Commerce Clause and Equal Protection Clause of the Constitution.
But that didn’t stop our California Legislature! In response to Lett v. Paymentech, the legislature enacted AB 1396 which amends Labor Code § 2751. Specifically, AB 1396 erases the prior references to out-of state employers and requires that whenever an employer enters into a contract of employment with an employee for services to be rendered within California and the method of payment involves commissions, the contract must be in writing and must set forth the method by which commissions shall be computed and paid. The employer must provide a copy of the contract to each employee and must also keep a copy which has been signed by the employee. In the event the contract expires and the parties continue to work under the terms of the expired contract, the contract terms will be presumed to remain in effect until the contract is superseded or employment is terminated by either party.
The term “commissions” is defined by AB 1396 to have the same meaning as set forth in Labor Code § 204.1 and does not include short term productivity bonuses, such as paid to retail clerks, nor 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. AB 1396 repeals the related provision that made any employer who violated the requirements of Labor Code § 2751 liable in a civil action for triple damages. However, substantial monetary penalties are still possible under existing state wage and hour law.
All employers, both in and out-of-state, must comply with the new law by January 1, 2013. While Labor Code § 2751, as amended, is relatively straightforward, the nuances of drafting a commission contract are more complicated. Indeed, the timing of the payment of commissions as well as the definition of how commissions are “earned” can have far reaching implications for the employer. Accordingly, employers are well advised to contact counsel for the drafting of a commission contract.
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