Effective January 1, 2013, all agreements to pay employees commissions based on services to be rendered in California must be in a writing signed by the employer and employee. Under AB 1396, the employer is obligated to document in that written agreement "the method by which the commissions shall be computed and paid." The bill further provides that, where the parties continue to work under the terms of an expired agreement, the terms are presumed to remain in effect until the contract is superseded or employment ends.
Many employers already document their commission practices and policies, most often in a commission plan or through less formal ways. However, it is now incumbent on all employers with employees rendering services in California to ensure such practices and policies are captured in a signed agreement. From a best practices perspective, the agreement should not only include the topics required by the bill, but also other key terms such as when commissions are earned and payable and commission payout upon or after termination. Additionally, employers will need to proactively update their agreements – in writing and in advance – to ensure that annual or quarterly changes are effective at the start of the new term, since verbal or late notice of such changes that purport to apply retroactively from the beginning of the applicable period may run afoul of the new law.
Because the bill is not effective until 2013, employers have the next year to evaluate and bring into compliance their commission documentation practices.