Pay by Commission? Better Have a Written Contract!

When an employee is paid by commission, disputes often arise between the employer and the employee as to how commissions are computed and paid.  When the underlying agreement was created orally or amended orally, there is no hard evidence of the what parties actually agreed to.  In October 2011, California solved this problem by amending Labor Code section 2751 to impose new duties on an employer whenever “the contemplated method of payment of the employee involves commissions.”

By January 1, 2013, every employment contract with an employee who is to be paid on commission  “shall be in writing and shall set forth the method by which the commissions shall be computed and paid.”  (Labor Code § 2751(a))  Furthermore, the employer must “give a signed copy of the contract to every employee who is a party thereto and shall obtain a signed receipt for the contract from each employee.”  (Labor Code § 2751(b))

Since it is common for commission structures to be periodically revised, the new law requires employers to get the revisions in writing that is signed by the employee.  “In the case of a contract that expires and where the parties nevertheless continue to work under the terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.”

The bottom line here is simple.  If you pay any employee on commission, you must have a written, signed employment contract that discusses how and when commissions are to be paid.