New California Law Requires Written Contract for Commission Pay Arrangements

Late last week, Governor Brown signed into law AB 1396, which requires commission pay arrangements to be set forth in a written contract.  All employers must comply by January 1, 2013. Under the new law, whenever an employer enters into a contract of employment with an employee for services to be performed in California and the employee’s compensation involves commissions, the contract must be in writing and set forth the method by which the commissions will be computed and paid.  The employer must give a signed copy of the contract to the employee and must retain the employee’s signed receipt of the contract.  In the event the contract by its terms expires but the parties nevertheless continue to work under the expired contract, its terms are presumed to remain in full force and effect until the contract is expressly superseded by a new contract or the employment relationship is terminated.  For purposes of the new law, “commissions” are defined in accordance with Labor Code section 201.4 as compensation paid to any person in connection with the sale of the employer’s property or services and based proportionately upon the amount or value thereof.  However, the new law specifies that “commissions” does not include short-term productivity bonuses nor bonus and profit-sharing plans, unless they are based on the employer’s promise to pay a fixed percentage of sales or profits as compensation for work.

There has been a fair amount of litigation in California over the meaning of “commissions” in cases dealing with the overtime exemption for certain commissioned salespersons.  This new law may well invite more litigation concerning commission pay within the state.  Employers who have employees performing work in California and who are even arguably paid in whole or in part with commissions should be provided a written contract (with an acknowledgement form for the employer to retain) setting forth the formula and timing for earning and payout of commissions.  Failure to comply could subject an employer to an action for penalties of $100 per pay period per aggrieved employee under the Private Attorneys General Act.