Link to AB 1396

Beginning January 1, 2013, anytime an employee performing services in California is compensated by commission, there must be a contract, in writing, between the employee and employer stating precisely how such commission will be calculated and paid.   Commission wages are defined as compensation paid to any person for services rendered in the sale of an employer’s property or services, based proportionately upon the amount or value thereof.  Thus, whether the employer routinely pays commissions or does so only on an intermittent or anecdotal basis, the new law requires written contracts.  Under the modified statute, however,  “commissions” do not include short-term productivity bonuses such as are paid to retail clerks; and do not include 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.

The law will also require the employer to retain a signed acknowledgment from the employee, and provide the employee with a copy of the contract.  Those employers who simply publish annual commission plans will need to incorporate the plans into a contract format and obtain written acknowledgements from each employee.   If a commission agreement expires, its terms will continue to govern the relationship until it is superseded or the employee terminates. 

Labor Code Section 2751 currently requires an employer who has no permanent and fixed place of business in the state, and who enters into a contract of employment involving commissions as a method of payment for services to be rendered within the state, to put the contract in writing. Under Section 2751, an employer who does not comply with those requirements is liable to the employee in a civil action for triple damages.  This statute has been held invalid (see Lett v. Paymentech, Inc., 81 F.Supp.2d 992 (N.D.Cal. 1999)) because it applied only to out of state companies.  AB 1396 alters the statute and makes it applicable to all employers doing business in California.  AB 1396 also removes the triple damages clause.  However, violation of the statute could result in litigation under California’s Private Attorney General Act (PAGA) and the Unfair Competition Law (B&P Section 17200). 

Under AB 1396, many employers will need to devote greater resources to the development and management of their commission plans.  Commission plans can be simple, but should always include provisions regarding when the commission is earned (versus when it is paid out), what conditions have to be met to earn the commission, and what happens to unpaid and/or unearned commissions when the employment is terminated.  Failure to consider and include such provisions can