A new state law, effective October 16, 2007, requires all employers of commissioned salespersons to give such employees written employment agreements. The agreement must be signed by both parties and contain all essential terms of employment concerning the material aspects of compensation. The failure to do so exposes employers to the possibility that an employee’s after-the-fact assertions of the terms of employment can be controlling, essentially allowing persons without contracts to decide and dictate the terms of their employment after they have started their job. Indeed, where a contract is lacking, courts will presume that an employee’s statement of the terms of employment is accurate and complete.
On its face, this law places employers who fail to execute written employment agreements in serious jeopardy. Beyond compensation, an employee without an agreement could literally be entitled to a presumption of guaranteed employment (and payment) for life, royalty payments, the right to usurp customers, and other terms, such as payment of an employee’s legal fees, unimaginable to most employers. Accordingly, employers must enter into written employment agreements with anyone working for them whose compensation, in whole or part, is commission based. Otherwise, an employer faces the prospect of an employee dictating – without need for negotiation or even consultation – the terms of a contract, which could then potentially bind an employer.
While employers, faced with this impending reality, may feel the need to rush into an agreement, doing so can be a costly mistake. Indeed, one of the reasons many employers avoid such agreements is that any misstatement or omission in a contract becomes binding. Hence, an employer who uses the wrong wording, forgets a certain term or condition, or who is unaware of the unintended consequence of certain language in a contract can unintentionally find itself party to an extremely unfavorable agreement – one which may be very costly to escape.
Employers must also realize that “commission” may be broadly defined. Hence, employees who receive a calculable fee per file, referral, or transaction, in addition to a salary, could easily be considered to fall within the new law’s protections. While most employers view such payments as “bonuses,” an effective argument can be made that these payments are actually commissions if the payments are a regular component of compensation, mathematically calculable, and not subject to the exercise of legitimate discretion. As such, an agreement with an employee to pay him/her a set amount per file, for instance, could likely entitle that employee to the presentation of a written contract, the failure to do so resulting in the imposition of presumed terms based solely on an employees verbal account.
Given the legal implications and potential consequences, employers should carefully develop and implement contracts with all employees covered by these new legal requirements.