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On September 30, 2012, California Governor Jerry Brown announced that he had signed AB 2675, involving “employment contract requirements.”  This bill amends Labor Code § 2751, which requires any employment contract for services to be rendered in California that “involves commissions” to “be in writing and set forth the method by which the commissions are to be computed and paid.”  AB 2675 adds an important exemption to the definition of “commission” that will substantially reduce the possibility that the statute could be applied to non-commission compensation plans.

Section 2751 has been a subject of concern for employers because it was recently revised to include all employment contracts in California – not just out-of-state employers with no fixed place of business in California.  The revision also incorporated the definition of “commission” from Labor Code § 204.1, which has been given a broad interpretation by the California courts.  Under current case law, sales employees who receive compensation calculated even in part on the price or amount of items sold could be considered to be paid by commission.  In fact, as a district court in Oakland recently noted, California case law “allow[s] every fixed amount of incentive compensation per [item sold] to be a ‘commission.’”  See Burden v. SelectQuote Ins. Servs., 848 F. Supp. 2d 1075, 1081-82 (N.D. Cal. 2012).  

 Although § 2751 as originally written exempts “bonus and profit-sharing plans” and “short-term productivity bonuses such as are paid to retail clerks,” the broad wording of the statute raised concerns that incentive plans, which are often based on sales volume, might be considered to “involve” commissions.  But no more.  AB 2675 adds another exemption to the definition of “commission” for purposes of the written contract requirement of § 2751: “commission” does not include “temporary, variable incentive plans that increase, but do not decrease, payment under the written contract.”  So although true commission plans will still need to be in writing, the revised statute substantially decreases the possibility that an employer who intends to pay sales staff on a non-commission basis could nonetheless be treated as paying commission and subject to the requirements governing commission contracts because of sales incentives or bonus plans.