NOVEMBER 9, 2012
California requires employers to have commission agreements
in writing
By Marjorie Fochtman and Danielle Johnston
Beginning on January 1, 2013, all employers must have written commission agreements for California
employees who are compensated on a commission basis. California’s AB 1396 was passed and signed
into law in 2011 and creates a new Labor Code section 2751. The law applies to all employers who
have employees in California who are paid a commission, regardless of whether it represents all or
just a portion of the employee’s compensation. The new section 2751 requires that each employee
performing work in California and paid on a commission basis receive a written contract that
specifies how the commission payments will be calculated and paid.
What counts as a commission?
The new Labor Code section 2751 borrows the definition of commission from Labor Code section
204.1, which defines a commission as “compensation paid to any person for services rendered in the
sale of such employer’s property or services and based proportionally upon the amount or value
thereof.” In order for a payment to be considered a commission under this definition, two
requirements must be satisfied. First, the employee must be employed principally in selling a product
or service. Second, the commission must be “sufficiently related” to the price or the amount of items
sold. This “sufficiently related” standard does not require the commission payment be a strict
percentage of the employee’s sales. A commission could be based on net profits or some other
formula that takes into account the employee’s sales efforts. Thus, even some bonus programs that
reward employees for increasing revenues could be considered “commissions” within the section
204.1 definition and thus subject to AB 1396’s requirements.
What does not count as a commission?
AB 1396 specifically exempts certain payments from the definition of commission. Short-term
productivity bonuses, such as those that are paid to retail clerks, are exempted. Additionally, in
September of 2012, the California legislature passed another bill further exempting from
commissions, “temporary, variable incentive payments that increase, but do not decrease payment
under the written contract.” In adding this additional exemption, the legislature intended to exempt
from the definition of commission short-term incentives such as a bonus offered to car salesmen to
sell a particular car on a particular day (“$500 to the first person to sell that yellow car we have had
on the lot for three months”).
Bonus and profit sharing plans are generally excluded, unless the bonus is based on a fixed
percentage of sales or profits. Employers should carefully evaluate whether bonuses and profit
sharing plans could fall within the statute’s requirements as California courts have interpreted broadly
Labor Code section 204.1’s definition of “commission.”
What are the specific requirements?
The new law requires the following:

that commission agreements be in writing;

that commission agreements set forth the method by which commissions will be computed
and earned;

that the employer provide the employee with a signed copy of the commission agreement;
and

that the employer obtain a signed receipt of the agreement from the employee
acknowledging both receipt of, and agreement with, the commission program.
Employers should also be aware that the expiration date in a commission agreement is invalid under
the new law, unless the agreement is immediately replaced by a new agreement or the employee is
terminated. Otherwise, the terms of the expired agreement will remain in full force until the
agreement is superseded or the employment is terminated.
The law is silent regarding whether electronic signatures are acceptable for the employer’s issuance
and the employee’s acknowledgement of receipt and agreement. Electronic signatures are generally
accepted in California, so this should not be an exception. Employers that issue commission
agreements electronically should ensure there is a method for recording the employee’s receipt of the
agreement.
Best practices under the new law?
-
Determine if your employees are paid by commission.
-
Create a written commission agreement for all employees who are paid by commission.
-
Set forth the eligibility criteria in the agreement.
-
Clearly define in plain language how commissions are computed.
-
Take special care to clearly define when commissions are “earned” and any conditions
required for the commissions to be “earned” (for example, if the customer must keep service
for one year before commission is “earned” by the employee).
-
Explain that advances or “draws” of unearned commissions are loans that will be reconciled
against later, earned commissions.
-
Explain how sales made by multiple employees will be treated.
-
Address how returns and refunds affect commissions if applicable.
-
Explain how termination of employment affects unearned and unpaid commissions.
-
State that employer has authority to modify plan. (Note: modifications must be in writing,
signed by the employer, and the employee must acknowledge receipt and agreement.)
-
Give all commissioned employees a signed copy of the agreement.
-
Have all commissioned employees acknowledge receipt of, and agreement to, the
commission plan.
-
Maintain records of the written commission agreements, evidence of issuance to employees,
and evidence of employees’ acknowledgement of receipt and agreement.
-
Preserve the records for at least four years after the agreement is superseded or the
employee’s employment ends.
For more information, please contact your Nixon Peabody attorney or:

Marjorie Fochtman at 415-984-8443 or [email protected]

Danielle Johnston at 415-984-8224 or [email protected]