January 1, 2013 Deadline For Commission Pay Contracts

A critical deadline is looming that affects all California employers that provide any form of commission pay to employees. By January 1, 2013, whenever an employer enters into an employment agreement with an employee who will be paid in whole or in part by commission, the employer must memorialize the agreement in a written, signed employment contract with the employee. The written contract must set forth the method by which the commissions shall be computed and paid. Employers must give a signed copy of the contract to each covered employee, and obtain a signed “receipt” confirming that the employee received a copy of the signed contract. The law also provides that when a commission contract expires and yet the parties continue to work under the contract, “the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.” See Cal. Labor Code Section 2751.

The term “commission” is defined to be “compensation paid to any person for services rendered in the sale of employer’s property or services and based proportionally upon the amount or value thereof.” Cal. Labor Code Section 204.1. The law provides that the term “commissions” does not include “short-term productivity bonuses such as are paid to retail clerks,” bonus and profit sharing plans, unless there has been an offer by the employer to pay a fixed percentage of sale or profits as compensation for work to be performed,” or “temporary, variable incentive payments that increase, but do not decrease, payment under the written contract.” Cal. Labor Code Section 2751(c).

Even before this law was passed, it was highly advisable for employers to carefully define commission pay terms and conditions in writing. The new law will make it mandatory.

The silver lining of the new law is that it provides an impetus for employers to review and update commission pay policies and practices, which should result in reduced legal risks for employers in the long run. A wide variety of common mistakes often plague employer commission policies/practices. Such mistakes include failure to properly define when commissions are deemed to be “earned,” assessing “chargebacks” against commission earnings in an unlawful manner, failing to recognize when termination of employment may/may not disqualify an employee from a commission payment, and failing to document in writing each employee’s agreement to commission plan terms and conditions.

Employers seeking further guidance on any of these issues may contact any of the firm’s lawyers listed below.

Raymond H. Hixson, Esq. ([email protected]; 408-486-9977)

Brian K. Nagatani, Esq. ([email protected]; 408-486-9988)

Mary Wang, Esq. ([email protected]; 408-486-9933)