In 2011, the California Legislature passed AB 1396 to amend Labor Code section 2751, and require that employers provide employees with a contract detailing the method by which commission, when applicable, would be computed and paid to employees.  The contract requirement is set to go into effect on January 1, 2013, and applies to in-state and out-of-state businesses that contract with employees for services within the state of California.

This requirement applies to employees if the contemplated form of compensation involves commission.  AB 1396 included exceptions from the definition of “commission,” including bonuses and profit-sharing plans, unless the compensation plans involve a fixed percentage of sales or profit as payment for work performed.

The Legislature further amended section 2751 at the end of the 2012 legislative session to include an additional exception to the definition of “commission.”  Now employers need not provide written contracts to explain a compensation system that includes payments that are temporary, variable and only increase the payment an employee may receive, as such a system is excluded from the definition of “commission.”

This amendment should remind any employer that has not yet prepared commission contracts to do so, have them reviewed and get executed copies from employees by January 1, 2013.  In addition, employers should now take the time to ensure that existing and drafted employee contracts reflect the change in the law.