Employers with sales teams in California need to get ready. California has a new commission contract law, AB 1396, which takes effect January 1, 2013. Under AB 1396, which amends California Labor Code section 2751, employers who pay commissions to their employees are required to enter into written commission contracts with employees. The contract must describe the method by which commissions are computed and paid. Employers must also provide a copy of the signed contract to each employee, and get a signed receipt from each employee. That’s the easy part. Here’s the tricky part. Going forward, when a contract governing commissions expires without being replaced but the employee continues work, the terms of the “expired” contract will apply to commissions until the parties sign a new agreement or until the employment is terminated. As a result, it will be important to get new commission contracts in place before or when the old ones expire.

“Commissions” under AB 1396 have the same meaning as in California Labor Code section 204.1: “Commission wages are 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.” AB 1396 excludes from the definition of “commissions” short term productivity bonuses such as those paid to retail clerks or bonus and profit sharing plans, unless the employer has offered to pay a fixed percentage of sales or profits as compensation. The exclusion language is not precise and leaves room for debate as to what types of payments are excluded from the contract requirement.

For employers who do not currently use commission contracts, it is not too early to start thinking about the terms and conditions that you would like to include in them. For employers that already use commissions contracts, you will want to review them and make sure that they comply with AB 1396 and detail how commissions are earned and paid. Employers with existing commissions contracts expire after January 1, 2013 need to be ready with superseding written agreements once the current contract expires.

Employers that have multiple commissions plans that apply to an individual employee will need to consider how they will implement, track, and end multiple commissions contracts for these employees.

California employers are not alone. The Legislature sought to follow the lead of Louisiana, Maryland, and Tennessee in requiring that all employers put commission-based employment contracts in writing. The Legislature believes AB 1396 will protect employees from fraud and abuse and employers from unnecessary litigation resulting from vague oral contracts.