California Requires Written Agreements by End of 2012

California Labor Code 2751 is being revised to require employers to place commission pay arrangements in writing. Businesses have the next 12 months to prepare.  Effective January 1, 2013, section 2751(a) will state:

“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.”

Employers will be required to “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.” Labor Code 2751(b).  If the contract expires, its terms continue until specifically superseded or the employment terminates.

Covered commissions are “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.” (Labor Code 204.1) The new law does not cover short-term productivity bonuses “such as are paid to retail clerks” or other 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.”  Labor Code 2751(c).

The former Labor Code 2751 required such written commission agreements only for employers with no “permanent and fixed place of business” in California.  However, in 1999 a federal judge found that limiting the law to such out-of-state companies was unconstitutional.  Thus, the revised code section seeks no such discrimination.  Now all businesses employing in California will be subject to the requirements.

While employers could find this “put it in writing” requirement an inconvenience,  the new law can be regarded as a positive incentive for businesses to nail down important specifics on their commission plans.

For example, it is not uncommon for a company to overlook defining the event or events after which an employee no longer earns a commission.  Is a worker entitled to a percentage of certain income the employer receives after his or her departure?  If so, what is the formula for confirming and calculating post-termination commissions? Where an oral (or just presumed) agreement can create an expensive fight over how much commission money, if any, a terminated employee has earned after his or her termination, a written agreement can establish the boundaries and cut-off points clearly.

While the revised law specifies no penalty or consequence for failing to place a commission agreement in writing, court could disregard a future employer’s claimed oral commission arrangements with workers as unenforceable, instead siding with an employee’s much more generous recollection of commission terms.  The state’s wage enforcement agencies or a court could also consider written commission agreements within the scope of “personnel records” and that an employer’s failure to maintain and provide them for inspection under Labor 1198.5 even subjects that employer to misdemeanor fines and even imprisonment under Labor Code 1199(c).

As there is no time like the present, it is a good idea to address any needed written agreements or revisions before the coming year has suddenly flown by.  An experienced labor and employment lawyer can of course help an employer steer clear of the ambiguities and create workable agreements that benefit all concerned.