As many employers know, California’s new written commission agreement law (Labor Code Section 2751) became effective on January 1, 2013. This new law requires employers that pay California employees “commissions” to do the following:

  1. have a written contract with the employee regarding commissions that is signed by the employer;
  2. include in the contract the method for calculating and paying the commissions; and
  3. require the employee to sign a “receipt” retained by the employer.

Unfortunately, while this law appears straightforward, it contains three major pitfalls for the unwary employer.

Pitfall #1: I only give my employees “bonuses” and “incentive compensation” as awards for making sales, not “commissions.” The law clearly does not apply to me, right?! Wrong. Section 2751 may apply because it does not turn on the employer’s choice of name for the incentive compensation. Section 2751 defines “commission” as “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionally upon the amount or value thereof.” Thus, compensation constitutes a “commission” where:

  • The employee is involved principally in the selling of a product or service, not making the product or rendering the service; and
  • The amount of compensation is a percentage or other ratio of the value of the property or service sold.

Even if a payment is called a “bonus” (or some other term), if it is paid as the result of the employee’s sale, and is based proportionally on the amount or value of the sale, it is very likely going to be considered a “commission” for purposes of Section 2751.

Any Exceptions? Yes. Not all sales-based compensation is automatically a “commission.” Section 2751 clarifies that it does not apply to three types of sales-related compensation:

  • Short-term productivity bonuses, such as those that are paid to retail clerks;
  • Temporary, variable incentive payments that increase, but do not decrease, payment under the written contract;
  • 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.

Pitfall #2: I don’t need to worry about this law because all of my sales employees are exempt, right?! No. Beware — Section 2751 applies to non-exempt and exempt employees!

Pitfall #3: I distributed my written commission agreements last year, and obtained employee signatures. I have complied with Section 2751 and need not worry anymore, right?! Alas, initial compliance with Section 2751 is not enough. If the terms of your commission plans change (as often happens at least annually for many sales employees), you need to make sure you distribute a signed copy of the new plan to employees and obtain a new signed receipt. This is particularly important because the law states: “in the case of a contract that expires and where the parties nevertheless continue to work under the terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.” Distributing new agreements when new commission plans are issued will help to protect you from claims that the terms of expired plans continue to apply.

Workplace Solutions: Employers should look closely at any forms of compensation paid to employees that might actually constitute “commissions” under Section 2751. If an employer determines that a payment does constitute a “commission,” the employer should ensure that an agreement is in place that comports with Section 2751’s requirements. Employers should also remember to ensure ongoing compliance with Section 2751 by updating and re-issuing written commission agreements as required by Section 2751 when commission plans change.