Employer Alert: New California Law Governs Commission Pay Arrangements

Many California businesses, including some aviation charter operators and aircraft sales companies, pay commissions to their sales personnel as all or part of the employee’s compensation. Although the law was enacted last year, as of January 1, 2013, all employers with salespersons in the State of California must set forth the commission pay arrangements in a written contract.

With the law going into effect in less than a month, now is the time for employers to make sure all employees who receive a commission have a written agreement with the company.

Douglas Stuart, Aerlex attorney, says “It is important to have carefully crafted agreements since this new law increases the risk of litigation for late commissions or wrongfully paid commissions.”

Under the new law, California Labor Code Section 2751, whenever an employer enters into a contract of employment with an employee for services to be performed in California and the employee’s compensation involves commissions, the employer must comply with the following:

1. Provide a written contract that sets forth the method by which the commissions will be computed and paid; and
2. The employer must give a signed copy of the contract to the employee and retain the employee’s signed receipt of the contract.

In the event the contract by its terms expires, but the parties continue to work under the expired contract, the terms will be presumed to remain in full force and effect until the contract is expressly superseded by a new contract or the employment relationship is terminated.

For purposes of the new law, “commissions” is defined as compensation paid to any person in connection with the sale of the employer’s property or services and based proportionately upon the amount or value thereof. However, the new law specifies that “commissions” does not include short-term productivity bonuses nor bonus and profit-sharing plans, unless they are based on the employer’s promise to pay a fixed percentage of sales or profits as compensation for work.

Aerlex’s legal team can assist you with complying with the new law and avoiding the problems that it presents. Our attorneys can prepare the commission agreements on your behalf and make sure that your employee manuals do not conflict with the strict requirements imposed by this new law.