2013 Law Requires Employers to Create Written Commission Agreements

By: Matthew Lloyd

On January 1, 2013 Labor Code Section 2751 became effective California Law, requiring employers to reduce commission agreements to a writing in order to protect employees from fraud and abuse, and protect employers from unnecessary litigation. Section 2751 applies to all employers who have employees who are in California who receive a commission even if the commission represents only a portion of the employee’s compensation.

THE LAW

Section 2751(a) states:

“Whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid.”

Section 2751(b) states:

“The employer shall give a signed copy of the contract to every employee who is a party thereto and shall obtain a signed receipt for the contract from each employee. In the case of a contract that expires and where the parties nevertheless continue to work under the terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.”

WHAT IS A COMMISSION?

Section 2751 uses the definition of “commission” from Labor Code section 204.1, which defines a commission as “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionally upon the amount or value thereof.” However, Section 2751(c) states that a commission does not include 1) short-term productivity bonuses, 2) temporary variable incentive payments that increase, but do not decrease, 3) 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.

THE PENALTY

While Section 2751 does not address the issue of damages, employers may be liable to employees for damages under a theory of unfair business practices or unfair competition, other sections of the Labor code, or penalties under California Private Attorney General Act, as well as associated attorney’s fees.

FORM OF THE AGREEMENT

Unfortunately Section 2751 does not currently provide specifics as to what terms need to be in the agreement. Without a doubt, the courts and legislature will provide more guidance on this issue in the years to come. In the meantime, however, employers should consider the following in their commission agreements:

1. Detailed description of how to calculate the commission
2. The term of the agreement and when the agreement expires
3. State the time when the commission is earned and when the commission will be paid
4. State conditions (if any) that need to be met in order to earn the commission
5. State how commissions will be paid at termination
6. State when commissions will be paid following termination

THE TAKEAWAY

Reduce Commission Agreements to a Writing

When in doubt, employers should create a written agreement, have the employee sign the written agreement, give the employee a signed copy, and retain a copy. While this certainly presents more work for the employer, this simple practice will eliminate the risk of unnecessary litigation.

D’Egidio Licari & Townsend, LLP’s lawyers are available to assist you in addressing any questions you may have regarding the developments of this law or drafting a commission agreement.