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HRPG LEGISLATIVE ALERT:
California Commission Law Information - Effective January 1, 2013
California companies with commission based sales teams need to gear up for a new commission agreement law, AB 1396, effective January 1, 2013. This law actually amends California Labor Code section 2751. Employers who pay commissions to employees will now be required to do so with a written agreement. This agreement must be in writing and must include a description of the method in which calculating and paying commissions is computed. Also, employers will be required to give employees a signed copy of the agreement along with an employee's signature that he/she has received the agreement. Even though this new law is short and simple, there is the potential for wage and hour claims against employers if any part of it is overlooked. Therefore we have included some steps an employer can follow to avoid these pitfalls. But first, what qualifies as "commission" and who could be paid a "commission"?
According to Labor Code Section 2751, the definition of commission is as follows: "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". Important to note is that AB 1396 does not include short-term productivity bonuses as they are not considered "commission". For instance, during a sales contest or other short-term incentive plan, no agreement needs to be provided as these employees would not normally be paid a commission. The statute also excludes "bonus and profit-sharing plans" as well as "temporary, variable incentive payments that increase but do not decrease payment under the written agreement."
We established what a commission is and isn't, but who could be paid a commission? Those employees who sell products or services; and whose commission earnings comprise a percentage of the price of a product sold or service rendered; and providing the actual service or making of the product is not a part of the employees' duties.
With every new law, pitfalls will surely arise. Going back to the definition of a "commission", employers should make themselves aware of what will and will not qualify as "commission" in California. Be sure that what you consider a bonus is not actually commission and vice versa. For example, an earned commission could be summed up with a signed agreement, goods that are paid for and completed financing. This is important when employers are creating an agreement and need to define procedure for completed sales that are returned or discounted and for termination of employment.
Now is the time for employers to begin thinking about implementing commission agreements and what terms and conditions will be included. If you already have a commission agreement in place, review it - making sure it complies with AB 1396. Be mindful too that under the new law, if a commission agreement has expired, it is still in effect until a new one replaces it.
Here is a best practices commission agreement outline for you to review:
- Specifically define when and how a commission is earned.
- Define "commission" and the formula used for calculating commission rates.
- Explain the procedure for commission "splits" among two or more employees.
- Specify what occurs in the event of a refund or return.
- Describe what will happen with unearned and/or unpaid commissions in the event of termination of employment.
- Stipulate it is at the employer's discretion to modify or discontinue the terms of the plan.
- Be sure to notate when a new agreement needs to be created and signed as an "expired" agreement will stay in effect until a new one is agreed upon and signed.
Please contact HRPG should you have any questions with regards to this new requirement. You may contact us at inquiries@hrpg.com or at 619-421-0074.
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