Last Fall, Governor Brown signed AB 1396 amending California Labor Code section 2751.  The new law states:

(a)  By January 1, 2013, whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid.

(b)  The employer shall give a signed copy of the contract to every employee who is a party thereto and shall obtain a signed receipt for the contract from each employee. In the case of a contract that expires and where the parties nevertheless continue to work under the terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.

(c)  As used in this section, “commissions” has the meaning set forth in Section 204.1.  “Commissions” does not include short-term productivity bonuses such as are paid to retail clerks; and it does not include bonus and profit-sharing plans, unless there has been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed.

According to California Labor Code section 204.1, commissions 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.”

The California Court of Appeal, Second District, clarified that compensation will be considered “commissions” if:

• the employees are “involved principally in selling a product or service, not making a product or rendering the service”; and
• “the amount of their compensation [is] a percent of the price of the product or service.”

Keyes Motors v. DLSE, 197 Cal.App.3d 557, 565 (1987).

If an employee’s compensation meets the Keyes test, then the employer must meet the following requirements of Section 2751 by January 1, 2013:

• Commission Agreements must be in writing
• The agreement must contain the method of computation and payment
• Employee must receive copy of signed agreement
• Employee must sign a receipt acknowledging he or she received the signed copy

This new law reaffirms California’s well-established rule that the right of an employee to commissions are governed by the terms of the contract for compensation. See Steinhebel v. Los Angeles Times, 24 Cal.App.4^th 696, 705 (2005).  Thus, it is important for employers to regularly review their sales commission agreements and consult legal counsel, if necessary, to ensure that commission computation and payment terms are clear and that they have complied with section 2751.