As was discussed in prior our Newsletters, effective January 1, 2013, all commission agreements must be put in writing. The amendment to the Labor Code applies to all employers whether or not located within California, with employees located within the state.
Specifics of the Writing:
- The method for the calculation of the commission compensation must be detailed in the agreement.
- The employee must receive a copy of the signed commission agreement
- The employer must obtain a signed acknowledgment from the employee that the contract has been received.
If there is a “term” (duration) to the contract, which term expires, and no commission agreement is entered into, it is presumed that the expired contract remains in effect, until replaced or until the employee’s employment ends.
What is a Commission?
The Labor Code defines “Commissions” as:
“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”.
So those employees who are involved in sales are covered by this new requirement, if their compensation includes a “commission” which is calculated as a proportion of the amount or value of the product or service sold. A commission will vary based on the sales volume each compensation period.
While “productivity bonuses” are excluded from this legal requirement, a bonus plan where the employee receives compensation for work performed that is based on a percentage of sales or profits would be required to be put in writing.
When are Commissions Earned?
Commissions are a form of “wages” and must be paid when “earned” . Once “earned” they must be paid in the next regular paycheck. When commissions are earned should be detailed in the Agreement, as such can vary depending on the employer’s business.
For example, a commission can be “earned” when the sales agreement (or P.O.) is signed; when the goods are delivered, when the goods are paid for, or some other condition which is expressly stated by the employer.
While there can be no “forfeiture” of earned commissions since they are “wages”, there can be offsets and/or charge backs against commission earnings but the offset or deduction must only be against “unearned” commissions so the designation of when a commission is “earned” is critical.
It is also critical to define what commissions will be considered “earned” and subject to payment to a departing employee.
What Should I Do?
- Review your written commission agreements to determine if all the required terms are included
- If you do not have written commission agreements (or sales pay plans), you must develop one prior to January 1, 2013 and have the affected employees sign the agreement and obtain an acknowledgment of receipt.