Last Call: Employers with California Commission-Based Employees Must Have Written Commission Plans in Place by January 1, 2013

by Wilson Sonsini Goodrich & Rosati

Employers with California employees who receive commission payments as part or all of their compensation have just weeks to ensure that their commission plans comply with the new requirements of California Labor Code section 2751.

Effective January 1, 2013, any commission plan entered into between a company and an employee performing services in California must be in writing and explicitly set forth the method by which the commissions are to be computed and paid. Cal. Lab. Code § 2751. The law also requires employers to provide a signed copy of the commission contract to every employee who is a party to the agreement and to obtain a signed receipt of the contract from each employee. If the contract expires during the employment relationship and the parties nevertheless continue to perform under the terms of the expired contract, then the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party. Id. The Labor Code clarifies that short-term productivity bonuses (such as those paid to retail clerks), bonus plans, and profit-sharing plans are not included in the definition of "commissions" in the new code section. Cal. Lab. Code § 2751(c). Under California law, "earned" commissions constitute wages and are generally subject to all Labor Code requirements regarding payment of wages, e.g., payment within specified periods and timely payment upon termination.

As a result, written commission plans in California likely will face greater scrutiny, and the failure to have a commission plan in place or the improper treatment of commission payments may have significant wage and hour ramifications.

To comply with the new requirements of Labor Code section 2751 and California case law, employers should carefully address the following considerations when preparing their commission plans:

  • Establish clear sales objectives.
  • Communicate the specific method by which the commission will be calculated.
  • Define clear and reasonable conditions that must be satisfied before the commission is actually "earned."
  • Establish appropriate payroll periods based on exemption status.
  • Review payroll policy to ensure that commissions are included in the regular rate of pay and overtime calculations for non-exempt employees.
  • Ensure payment of the commission in the payroll period immediately following the period in which the employee "earns" the commission.
  • Include any explicit forfeiture provisions required to comply with the Sarbanes-Oxley and Dodd-Frank Acts, or as otherwise permitted under California law.
  • Explain how an employee's employment termination or leave of absence may affect commission eligibility and payment.
  • Reiterate at-will employment status.
  • Require signatures of employee and a company representative, as well as a signed acknowledgement from the employee as conditions of eligibility.
  • Ensure that the plan complies with Section 409A of the American Jobs Creation Act.1

For assistance in preparing or reviewing written commission plans, please contact Fred Alvarez, Rico Rosales, Marina Tsatalis, Laura Merritt, Alicia Farquhar, or any other member of Wilson Sonsini Goodrich & Rosati's employment and trade secrets practice.


Attorneys from Wilson Sonsini Goodrich & Rosati's employment and trade secrets practice, as well as its employee benefits and compensation practice, will conduct a webinar on Tuesday, December 4, 2012, at 10:30 a.m. PST regarding the new requirement under California Labor Code Section 2751 that California employers have written commissions plans. The webinar will cover practice pointers for drafting commission plans, key compliance issues, and potential pitfalls. To register, please click here.

1 For assistance with respect to Section 409A compliance, please contact a member of the WSGR employee benefits and compensation practice.

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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