California Requires Written Employment Contracts For Commissioned Employees

Summary:

As of January 1, 2013, every employer of employees whose services are to be rendered within California, whose compensation “involves commissions” must have a written employment contract.  

The contract must specifically state the method by which the commissions are computed and paid.  The employer must give a signed copy of the contract to the employee, and must obtain a “signed receipt” for the contract from each such employee.

Further, if the written contract expires and the parties continue to work under it, then the contract is presumed to remain in full force and effect until the contract is superseded or the employment is terminated by either the employer or the employee.

 

Who does this law affect?

Every employer who employs even one employee whose compensation “involves commissions” is affected by this law.  This applies even if the employee is part time or temporary.  And misclassifying an employee as an independent contractor won’t get around the issue – there’s a $25,000 penalty for willfully doing so.

What are “commissions” for purposes of this law?

“Commissions” that trigger the requirement for a written employment contract are defined as compensation paid to any person for services rendered in the sale of the employer’s property or services and based proportionally upon the amount or value thereof.

While at first this definition seems all inclusive, it is more nuanced.  At least one California court has distinguished commissioned employees based upon whether they are selling a product or service, or are actually rendering the service itself.  For example, auto mechanics who are paid a fixed percentage of the hourly rate charged to customers were not commissioned employees, because they are rendering the service, not selling it.  However, if they were principally involved in selling the service, the result would be different.

For purposes of this law, “commissions” do not include: 1) short term productivity bonuses such as are paid to retail clerks; 2) temporary, variable incentive payments that increase, but do not decrease, payment under the written contract; or 3) bonus and profit-sharing plans, unless there has been an offer from the employer to pay a fixed percentage of sales or profits as compensation for work to be performed.

 

What are the consequences of failing to comply with the law?

It is unclear at this time what all of the consequences will be.  The legislature repealed the statute pertaining to damages for non-compliance after a prior version of the law was declared unconstitutional.  However, employees may bring an unfair competition lawsuit or possibly a private attorney general act lawsuit to redress violations.  Lawsuits brought to recover commissions may carry one-way attorney fee shifting provisions, providing that employers must pay not only their own attorneys’ fees but also those of an employee who successfully sues them.

 

What employers should do now:

Employers should bring themselves into compliance as quickly as possible.  However, drafting a valid and enforceable employment contract with the appropriate provisions should be handled by an expert.  Employers should consider having an experienced employment law attorney draft the employment contract for commissioned employees.


For questions about this or other California labor and employment law issues, please contact us at 310-302-9100.

© Alexandra M. Steinberg 2016 All rights reserved.