Effective January 1, 2013, California’s new Labor Code section 2751 requires employers to provide written commission plan agreements to all employees who perform services in California and whose compensation involves commissions. The agreement must explain the method by which the commissions shall be computed and paid. The commission plan must also be signed by the employer and the employer must obtain a signed receipt from each employee.

The new law incorporates the definition of commissions from California Labor Code section 204.1, which defines commission wages as “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.” Types of payments that are specifically excluded from this definition include:

  • Short-term productivity bonuses such as are paid to retail clerks;
  • Temporary, variable incentive payments that increase, but do not decrease, payments under the written commission contract; and
  • 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 new law also clarifies that, in the case where a commission plan 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terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or the employment relationship is terminated by either party. This further reinforces the need for employers to provide updated commission plans prior to implementing them among their workforce.

While the statute does not include any specific penalty provisions for failure to comply, employers should be wary of ignoring this requirement and potentially strengthening an employee’s argument that his or her interpretation of the plan terms and provisions is entitled to greater weight.

Year end is also the perfect time to evaluate the legality and viability of existing compensation plans, especially with respect to compliance with multi-state requirements.