March 11, 2014

Beginning on January 1, 2013, Commission Agreements for California Employees Must Be In Writing and Signed

The New Requirements

Effective January 1, 2013, employers paying sales commission to California employees must enter into written employment agreements with the employees. Labor Code section 2751 previously required out-of-state employers with no permanent and fixed place of business in California who use commissions as a method of payment for employees to put those contracts in writing. The new section 2751 applies to all employers with commissioned employees in California, whether or not the employer is located in California. The new law applies whether sales commission constitutes all or simply one part of the employee’s compensation. Setting forth commission terms in an employee handbook or a written commission policy will not satisfy the employer’s obligations under section 2751.

Section 2751 also requires that the written commission agreement explain how the commission is computed and paid. The agreement should also clearly define when and how a commission is “earned” and any conditions required for the commission to be “earned.”

In addition, section 2751 requires that employers give the employee a signed copy of the written commission agreement and obtain a signed acknowledgment from the employee confirming that he or she received a fully-signed copy of the agreement. The employee’s signed acknowledgment and the fully-signed agreement should be maintained in the employee’s personnel file.

If the written commission agreement expires, but the employee continues to work under the terms of the expired agreement, the terms of that agreement are presumed to remain in full force and effect until it is superseded or the employment relationship ends. Employers who wish to terminate or change commission terms should do so by a written amendment to the prior agreement or by a new written agreement that expressly supersedes the prior commission agreement.

For purposes of section 2751, short-term productivity bonuses and certain bonus and profit-sharing plans are not “commissions.” Section 2751 does not apply to independent contractors.

The Consequences of Non-Compliance

Although section 2751 does not provide for any specific damages or penalties for failure to comply, that does not mean the new requirement has no teeth. For instance, noncompliance could lead to penalties under California’s Private Attorneys General Act (PAGA) or a remedy under California’s unfair competition laws. Under PAGA, the employer may be held liable for, among other things, penalties at the rate of $200 per pay period for each commissioned employee who was not provided a written employment agreement in compliance with section 2751.

What To Do By January 1, 2013?

With the January 1, 2013 deadline rapidly approaching, employers should ensure that written commission agreements which comply with section 2751 are in place before the deadline. For employers that already have a written commission agreement, it is also a good time to review the agreement to ensure it complies with the new law. Written commission agreements should include: (1) what conditions must be met to earn the commission; (2) how the commission will be calculated; (3) when the commission will be paid; and (4) what happens to unpaid commissions upon termination of employment. Employers must provide signed copies of the agreement to the employee and require that the employee sign an acknowledgment confirming receipt of a signed copy of the agreement.