Are your commission agreements in writing? If not, we need to talk. Effective January 1, 2013, all employees working in California who are compensated on a commission basis (whether as their entire compensation or partial compensation) must have a written agreement setting forth how commissions are computed, how and when commissions are earned, and how and when commissions are paid out, including how commissions will be dealt with at the termination of the employment relationship.
This new law applies to all employees performing work in California, regardless of whether the employer is physically located or based in California. The employer must provide the employees with a signed copy of the written agreement and must maintain a signed copy of each employee’s acknowledgment of receipt of the written agreement.
Additionally, if the written commission agreement has an expiration date, but the parties continue to work together pasted the expiration date, it is presumed that the terms and conditions set forth in the written agreement remain in force and effect until the written agreement is expressly superseded by a new written agreement or until the termination of the employment relationship.
For purposes of this law, “commissions” has the same meaning as set forth in the Labor Code §204.1, which defines commissions as “compensation paid to any person for services rendered in the sale of such employer’s services or property and based proportionately on the amount or value thereof.” However, “commissions” does not include short-term productivity commissions such as those paid to retail clerks. “Commissions” also does not include bonuses or profit sharing plans unless the bonus or profit sharing plans are based on a fixed percentage of sales or profits for work performed. In September 2012, the legislator further clarified that “commissions” does not include “temporary, variable incentive payments that increase but do not decrease payment under the written agreement.”
Failure to comply with the requirements of this new law subjects the employer to potential significant liability. Not only will the employer be liable for actual damages incurred by the employee, it could also be liable for $100 per pay period per aggravated employee.
Written commission agreements need not be complicated, but there are several issues that should be addressed. For example, when is a commission “earned,” does the employee receive commission advances and how are those advances recouped if not earned, what happens if the employee does not meet a quota, and when are the earned commissions paid.
Record retention regarding written commission agreements is also important. All records regarding written commission agreements, including the agreement and acknowledgment forms, should be maintained for at least four years after the employment relationship is terminated.