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Time to Get Commission Agreements in Writing

We’ve said it before, about the need to get things in writing, but now getting commission schedules in writing will be the law here in California starting next year:


This parallels the requirement from the beginning of last year that effectively requires that every employment relationship gets put into writing via a state-supplied form.

One important issue is the distinction between a commission and a performance bonus, which is not required to be in writing: “‘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 as been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed.” Cal. Lab. Code sec. 2751(d).

Each commission contract needs to be acknowledged by both the business’ representative AND the employee, who needs to get an acknowledged copy. The fact that a physical signature is not required actually brings us into the 21st century — even if the best process is to still get a physical signature from both parties to the contract. If you want to conduct everything electronically, you can — but make sure the information is backed up and easily accessible.

If the contract is only for a particular period of time, but work is still being done, it is presumed that the contract is still in force until there is a new written contract, or the employment is terminated.

Consulting with Bay Oak Law about your specific situation is best, but if you want to walk on the wild side and do it yourself, know that the following issues are key:

A Percentage of What? Commissions are normally percentage based, and it should be clear what the percentage is of. Is it of the sales price? Is it what the client actually pays (important if there are discounts for early payment)? Is it the net profit or gross profit? This needs to be clearly spelled out.

Are There Limits? If your commissioned salespeople have territories, what happens if the salesperson makes a sale outside the territory? What about later purchases by the same customer — does the salesperson get anything for those, and if so, for when?

When Is It Earned? Is the commission earned when the order is handed in? When it is shipped? 31 days after receipt by the customer? The clearer this is, the better off both the employer and employee are — once they agree to the terms.

Advances Policy? Is the commission considered an “advance” that might be withdrawn or reversed? This procedure has to be in writing, or it is likely to be disregarded by the Labor Commissioner or the court.

Clawbacks? If the product is returned, does the employer have the right to “clawback” the commission? If so, under what conditions? Unless these conditions are in writing on the document that the employee acknowledges receiving, it is not likely to be enforced.

Is the Employment At Will? The terms of the employment should be listed: is it for

How Long Does It Last? If there is a length of time (six months, three years, etc.), the writing should also make clear what happens after the term is done, but the parties are still continuing to perform. If the contract is terminable at will, specify what happens after it is terminated, but there are commissions in the pipeline.

There are a lot of variables, and a consultation with a lawyer can be valuable.



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