California Employers: New Law Requires a Written (and accurate) Commission Agreement

On January 1st, a new California law, AB 1396, will require all California employers who pay commissions to employees to have written contract setting forth “the method by which the commissions shall be computed and paid.”    The employee must be given a signed copy of the contract, , and the employer must keep a signed copy on file.  If the employee keeps working after the commission agreement expires, then it is presumed to remain in effect until superseded or employment is terminated.

So what qualifies as a commission payment under the law?  Basically, any payment based on a percentage of overall sales.  The Labor Code defines commissions as “compensation paid for services rendered in the sale of the employer’s property or services and based proportionally upon the amount or value thereof.”   The new law specifically excludes short-term productivity bonuses paid to retail clerks, and bonus or profit sharing plans (unless they involve a fixed percentage of sales or profits for work to be performed).

Make certain your commission agreements are clear and unambiguous.  State how the commission is calculated, when it is earned and payable, and  clearly spell out if any payments are subject to a draw or recalculation based on cancellations or refunds.  In addition, be certain to give yourself the right to revise the terms of your agreement upon reasonable notice to the employee.   Ambiguities in employment contracts are nearly always interpreted in favor of the employee, so a clear explanation of your commission structure will help avoid problems if and when an employee is terminated.