California Adds More Burdens on Employers: New Commission Contract Requirements

» Posted in News & Resources

Employers with commissioned sales personnel in California need to be aware of yet another state regulatory requirement: the new commission contract law, AB 1396.  Although this law does not go into effect until January 1, 2013, it’s time to start preparing contracts and implementing procedures in order to comply.

Under AB 1396, employers who pay commissions to their California employees are required to: 1) enter into a written commission contract with each employee; 2) describe the method by which commissions are computed and paid; 3) provide a copy of the signed contract to each employee; and 4) obtain a signed receipt from each employee.

The new law goes on to state that when a commission contract expires, but the employee continues to work, the terms of the expired contract “are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.”  For employers with annual commission plans, it will be important to get the new written plan in place, signed and a receipt from the employee before the old one expires.

Commissions are defined as any “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.”  So, whether an employer routinely pays commissions or does so only on an intermittent or occasional basis, AB 1396 requires that the employer have written contracts in place.  However, the new law does exclude short-term productivity bonuses (such as those paid to retail clerks) and profit sharing plans, unless the employer has offered to pay a fixed percentage of sales or profits as compensation.  As is often the case with these laws, the exclusion language is somewhat ambiguous and it is still not clear what types of payments are excluded from the written contract requirement.

For employers with no commission contracts currently in place (for example, if commission plans are provided as a generic handout or posted on a company intranet), now is the time to start converting those plans into written contracts, being sure to incorporate terms that protect the employer.  Employers who already have written commission contracts in place will still need to review them to ensure they comply with all the requirements of AB 1396, especially with regard to how commissions are earned and when they are paid.  All employers will have to devote sufficient resources to develop and manage their commission plans with respect to each of their California employees.  The requirements of AB 1396 drive home just how tricky commission plans can become and how easy it is for an employer to get tripped up by these statutes.  Employers really are best served by having legal counsel carefully review commission plans and advise on procedures.  California in particular is a dangerous landscape for employers – let’s be careful out there!