California says Commission-based Contracts Must be in Writing

3/22/2012

Do you have salespeople who work in California? Do you pay them on commission? If so, you should know about Assembly Bill 1396, which California Gov. Jerry Brown recently signed into law. By January 1, 2013, you will be required to have a written contract of employment with your salespeople in California who are paid based on commission.

The California Labor Code defines “commission” 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.”  No matter if an employer routinely pays commissions or does so intermittently, the new law requires written contracts.

However, under AB 1396, commissions do not include “short-term productivity bonuses such as are paid to retail clerks; and it does not include 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.”

Under AB 1396, an employer who enters into a contract of employment involving commission payments must do the following:
 
  • Describe the method it will use to compute and pay commissions
  • Give every employee who has a signed commission contract a copy of that contract
  • Get a signed acknowledgement from the employee that he or she received a copy of the contract

If you currently have a contract with an employee, the terms and conditions of that contract will continue to apply -- even after that contract expires -- until a new contract is agreed upon or employment is terminated.

Although the new law removes the triple damages provisions of the old law, disagreements over whether commission should have been earned or paid could lead to costly litigation, especially in California where employees who are paid based on commission may qualify to be exempt from overtime compensation requirements. In California, commissioned salespersons are exempt from the overtime compensation requirements if (1) their earnings exceed one and one-half times the minimum wage and (2) more than half of the employee’s compensation is from commissions.

Because you must comply with AB 1396 by January 1, 2013, you should begin to consider the terms and conditions you would like to include in your written contracts.. The commission contracts do not need to be complicated, but they should be carefully worded. For example, the contract should:
 
  • Define how the commission will be calculated
  • Define when the commission will be earned
  • State how frequently the commission will be paid
  • State what happens to unpaid and/or unearned commissions when employment is terminated

Employers should not forget that California labor and employment laws are different than federal and Michigan labor and employment laws. California labor laws are usually more generous. For example, in California, employees are entitled to daily overtime. An employer who fails to pay daily overtime may receive a civil fine and employees are eligible to recover unpaid overtime wages, attorneys’ fees, interest and waiting time penalties.

Another example of California’s generosity are mandatory break periods. California labor laws require employers to give employees break periods for meals and rest. Employees can recover one hour of pay at the regular rate of pay for each day he or she is not provided a proper rest period or meal break.

If you have questions regarding California’s new rule regarding employee commissions or what you should include in your written commission contract, then please contact Steve Palazzolo (spalazzolo@wnj.com or 616.752.2191), Tara Kennedy (tkennedy@wnj.com or 616.752.2717) or any other member of the  Labor and Employment Practice Group at Warner Norcross & Judd.

NOTICE. Although we would like to hear from you, we cannot represent you until we know that doing so will not create a conflict of interest. Also, we cannot treat unsolicited information as confidential. Accordingly, please do not send us any information about any matter that may involve you until you receive a written statement from us that we represent you.

By clicking the ‘ACCEPT’ button, you agree that we may review any information you transmit to us. You recognize that our review of your information, even if you submitted it in a good faith effort to retain us, and even if you consider it confidential, does not preclude us from representing another client directly adverse to you, even in a matter where that information could and will be used against you.

Please click the ‘ACCEPT’ button if you understand and accept the foregoing statement and wish to proceed.

ACCEPTCANCEL