Written Commission Agreements Required in California

Winter 2012Articles California Update

Last year, Assembly Bill 1396 was passed. It requires any employer who pays commissions to employees to have a written contract setting forth “the method by which the commissions shall be computed and paid” by January 1, 2013. The employer must give a copy of the signed agreement to the employee and keep a signed copy on file. If the commission agreement expires, and the employee keeps working, then it is presumed to remain in effect until superseded or employment is terminated.

Questions may arise as to whether an employer’s pay practices actually involve commissions. The Labor Code defines commissions as compensation paid for services rendered in the sale of the employer’s property or services and based proportionally upon the amount or value thereof. And certain types of payments are not considered commissions for the purpose of the written requirement. The new statute specifically excludes: (1) short-term productivity bonuses paid to retail clerks, (2) temporary, variable incentive payments that increase, but do not decrease, payment under the written contract, and (3) bonus or profit sharing plans, unless they involve a fixed percentage of sales or profits for work to be performed.

Employers are advised to keep commission agreements simple. Be sure to clearly explain how the commission is calculated. Define terms such as “gross profit” versus “net profit” or “company accounts” versus “employee accounts.” Also clarify when the commission is earned versus when it is paid. Clear terms on these issues will avoid ambiguity and disputes upon termination. In addition, employers should include a right to revise the agreement upon notice to the employee.