Employers: Methods for Computing Commissions Must be Put in Writing
Beginning January 1st, all companies employing commissioned workers in California must provide written agreements describing the method by which commissions are computed and paid, per Assembly Bill 1396.
The new requirement comes from recent legislation which amends the California Labor Code. Formerly, it applied only to out-of-state employers who employ California-based workers.
The Labor Code defines a commission 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.
Since commissions are actually wages, it’s important for you as an employer to make sure you pay them correctly and on time, to prevent wage and hour claims.
Avoiding Employee Claims for Unpaid Wages
It is not enough to merely outline how commissions are computed and earned. As someone who hires commissioned employees, you must describe the calculation methods into a written contract, sign it, and then obtain a signed receipt for the contract from the commissioned employee.
You should clearly define when a commission is “earned.” Will your employee earn commission when a sales agreement is signed, when products are shipped, or when the company receives payment from the client for the products or services?
Make sure you follow the terms of your agreement with your employee.
AB 1396: Other Considerations
The new law affects employers who routinely compensate employees through commissioned pay structures, as well as those who use this method on an occasional or even rare basis.
Also per AB 1396:
- If your commission agreement expires, the terms of your signed agreement will remain in effect until you supersede it, or until the agreement is terminated in writing.
- You won’t have to include short-term productivity bonuses (i.e. for retail clerks) or bonuses and profit sharing plans as commissions, unless you offer to pay a fixed percentage of sales or profits as compensation for work to be performed.
This may seem like extra paperwork, but there is some good news for employers, as AB 1396 repeals a Labor Code provision making an employer who violates this section liable for “triple damages.” Still…to prevent employee claims in the first place, get your agreements in order now, before the New Year.
Sue M. Bendavid is the Chair of the Employment Practice Group, which defends employers from wage and hour and other employee claims. Email her for more information: firstname.lastname@example.org.