On January 1, 2013, California’s revised Labor Code §2751 went into effect. The code sets forth the requirements that companies must follow in communicating commission plans to employees who are in California. Interpreted conservatively, a commission is any incentive based on sales performance. The code states that the plan must be in writing, and it must explain how commissions are calculated and when they are to be paid. If a plan expires before a new plan is in place, the terms of the existing plan remain in effect until the plan is superseded or employment is terminated.
In order for the plan to take effect, it must be signed by the employer, and the employer must provide a signed copy to the employee. In addition, the employee must sign an acknowledgement of receipt of the plan. Of course, the employee has the option to refuse to sign the new plan, in which case the employer can terminate employment, stop paying any commission, or continue employment under the old agreement. Employer and employee signatures can be electronic. Although not specified in the code, it is recommended that electronic signatures comply with California’s Uniform Electronic Transaction Act (UETA).
Although the code does not specify penalties for noncompliance, legal experts see the terms as favorable for plaintiff lawyers. It is possible that failing to abide by the code could be subject to the penalties specified in California’s Private Attorneys General Act (PAGA). Those fines are $100 per employee per pay period for the initial violation, and $200 per employee per pay period for subsequent violations. In addition, the court could place the burden on the employer to prove the terms of the contract, otherwise it will presume the employee’s commission calculations are correct.
The commission plan document should answer the following questions:
- When does the plan expire? If no specific date is given, it is recommended that you include language stating that the contract does not expire unless expressly advised by the employer.
- To whom does the plan apply?
- How is the commission calculated?
- How and when is the commission classified as being earned? You should define the time of earning as late in the sales cycle as possible, in order to allow for ample time to calculate and disburse the payment.
- When is the commission to be paid? It is recommended to follow California’s Labor Code Section 204, which states that wages earned between the 1st and 15th of the month must be paid between the 16th and 26th of that month. Wages earned between the 16th and last day of the month must be paid between the 1st and 10th of the following month.
- Are any amounts paid considered advances until certain conditions are satisfied (i.e. implementation for a software sale)? If so, it should be clear that you are recovering an advance on future earnings, not a commission that has already been earned. The circumstances under which advances can be recovered should be detailed in the document.
- What happens to unpaid commissions when employment is terminated? Labor code sections 201-203 could apply, which state that earned wages must be paid on the last day of employment for an involuntary termination or for a voluntary resignation with more than 72 hours’ notice. For a voluntary resignation with less than 72 hours’ notice, earned wages must be paid within 72 hours of the last day of employment.
- Does the employee forfeit any commission upon termination? It is recommended that the document distinguish between voluntary and involuntary termination. For voluntary resignations, it is likely that the provisions of the plan are enforceable. For involuntary terminations, the provisions of the plan could be more problematic, especially if it could be perceived that the employer terminated employment in order to avoid paying commissions. Either way, it should not be classified as a “forfeiture”. Instead, legal experts recommend stating that continued employment is a condition to earning the incentive pay.
We at The Cygnal Group are experts in sales compensation plan design; we are not attorneys. We recommend that you consult legal counsel to ensure your sales compensation plans comply with California Labor Code §2751 and all other applicable laws.
Primary Source: “Preparing for California’s New Sales Compensation Law”; a WorldatWork webinar presented by David Cichelli of the Alexander Group and Anne Brafford of Morgan, Lewis & Bockius LLP; September 12, 2012.
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.