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February 2013

New Legislation Requires Written Agreements on Compensation

Employers Must Memorialize Commissioned Employees' Wages

Effective Jan. 1, new legislation restored a regulation requiring California employers to provide written agreements to all employees earning commissions. The law, AB 1396, revises and reinstates §2751 of the California Labor Code, which a federal court found unconstitutional in 1999.

While §2751 does not provide penalties, employers in violation of this provision could incur penalties or civil liability under various provisions of the California Labor Code, the Private Attorneys General Act, or California’s Unfair Competition Law.

To comply with the revised §2751, employers must provide each commissioned employee a written agreement explaining how commissions are computed and paid. Employers must sign the agreement prior to providing it to employees. The employer must also retain a receipt signed by the employee in which the employee acknowledges receiving a copy of the agreement. If such a written commission agreement expires, the contract terms remain in full force until a new contract is entered into or until employment terminates. Employers should be mindful of existing wage regulations to ensure commission agreements comply with applicable law, such as the requirement that employers pay all earned wages on the next regular payday after they have been earned and the requirement that commissions be reasonably calculable.

For purposes of the revised §2751, “commission” wages are any compensation based on a proportion of the sale of the employer’s property or services. This does not include short-term productivity bonuses or profit-sharing plans, unless the employer has offered to pay a fixed percentage of sales or profits as compensation for work performed.

AB 1396 does include an employer-friendly provision in that it repeals §2752 of the Labor Code, which had tripled damages for any employer who failed to provide a written compensation agreement.

AB 1396 is a reaction to 1999’s Lett v. Paymentech, Inc., in which the U.S. District Court for the Northern District of California found unconstitutional the prior version of §2751. Previously, §2751 only affected employers that did not have a permanent and fixed place of business in California. The court found that this discriminated against out-of-state employers, burdened interstate commerce and, therefore, ran afoul of the U.S. Constitution’s Commerce Clause. AB 1396 remedies this deficiency by making the commission agreement requirement applicable to all employers doing business in California, regardless of whether they have a fixed place of business in the state.

In light of these new requirements, California employers, and employers with employees working in the state of California, should provide all employees with written compensation agreements and memorialize existing agreements with commissioned employees. Employers are urged to consult with counsel to determine whether they may need assistance in drafting updated commission agreements or updating their employee handbooks.

Employment Law

Employment Law