BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 1370
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          Date of Hearing:   June 23, 2010

                                Sandre Swanson, Chair
                SB 1370 (Ducheny) - As Introduced:  February 19, 2010

          SENATE VOTE  :   22-7
          SUBJECT  :   Employment contract requirements.

           SUMMARY  :   Requires that all employers provide a written  
          contract to employees who are paid commission.  Specifically,  
           this bill  amends Section 2751 of the Labor Code to require all  
          employers to provide a written contract, with specified details,  
          to employees who are paid commission. 

           EXISTING LAW  :

          1)Requires employers with no permanent and fixed place of  
            business in California to provide written contracts to  
            employees, when the method of payment involves commission,  
            which specifies the way in which the commissions will be  
            calculated and paid. 

          2)Subjects employers who fail to comply with the written  
            contract requirement to civil action for triple damages. 

           FISCAL EFFECT  :   Unknown

           COMMENTS  :  According to the author, this bill eliminates an  
          unconstitutional inconsistency in the California Labor Code in  
          which employers residing and conducting business in the state  
          are not required to put employee commission contracts in  
          writing.  The author notes that the United States District court  
          ruled in Lett v. Paymentech, Inc. (1999) that existing code and  
          practice violates the Commerce Clause and the Equal Protection  
          Clause of the United Sates Constitution.  All employers  
          conducting business in the state must conform to the same  
          commission contract requirements.  The author states that while  
          the court decision addresses the unconstitutional practice and  
          current practice follows the court decision, California's Labor  
          Code does not currently reflect the court decision.  The author  
          asserts that this bill updates Labor Code to reflect  
          constitutional practice by requiring all employers, regardless  
          of their place of residence to have commission contracts in  


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          A commission, as defined in Section 204.1 of the Labor Code, is  
          compensation paid to any person for services rendered in the  
          sale of such employer's property or services and base  
          proportionately upon the amount or value there of.  According to  
          the Division of Labor Standards Enforcement (DLSE) Enforcement  
          Policies and Interpretation Manual (Manual), compensation that  
          is based on a percentage of sale is considered commission.  In  
          contrast, however, a compensation plan which pays employees for  
          the number of pieces of goods finished, the number of  
          appointments made or the number of procedures completed, is  
          based on a piece rate. 

          The term "commission wages" was defined in 1988 by case law  
          (Keys Moters, Inc. vs. DLSE). The court found that commissions  
          arise from the sale of product, not the making of a produce or  
          the rendering of service.  According to the DLSE Manual, in  
          order to be a commission, compensation must be a percentage of  
          the price of the product or service which is sold.  In 1999, the  
          California Supreme Court ruled that the Labor Code definition of  
          commission applies to all employees receiving commission. 

          For a compensation to qualify as commission, it must meet the  
          requirements of a" commission wage" as set out in the Keys  
          Motors case (see above).  Bonuses however are usually based on  
          reaching a minimum amount of sales or making a minimum number of  
          pieces rather than based on the price of a product or service.  
          Case Law
          In Lett vs. Paymentech, Inc., the United States District Court  
          (USDC) found both California Labor Code Section 2751, which  
          requires out of state employers to enter into a written contract  
          with commissioned employees and Labor Code Section 2752, which  
          allows employees to seek damages when the employer fails to  
          comply, to be unconstitutional.  According to the USDC, Labor  
          Code Section 2751 is discriminatory because it does not apply to  
          employers with a permanent place of business within California,  
          but subjects those outside of the state to damages.  The court  
          notes that if the goal is to protect employees, then all  
          employers should provide a written contract regardless of their  
          fixed and permanent place of business. 


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          Laws similar to the California's current statute have also been  
          deemed unconstitutional because they were found to be either a  
          violation of the Commerce Clause or a violation of the Equal  
          Protection Clause of the United States Constitution.  For  
          example, a Pennsylvania statute that required "principals" -  
          defined as "any person who does not have a permanent or fixed  
          place of business in Pennsylvania - to enter into written  
          contracts with any employees paid on commission was deemed  
          unconstitutional under the Commerce Clause.  In 1993, the USDC  
          Western District of Pennsylvania found, in Palmer-Lucas v.  
          Martin's Herend Imports Inc., that, while the statute had a  
          legitimate purpose to protect in-state sales representatives  
          from abusive behaviors of employers, there was not valid reason  
          to exempt in-state employers.  In Cecil v Duck Head Apparel Co.  
          (1995) a Kentucky, a statue with language similar to that of the  
          Pennsylvania law mentioned above was deemed unconstitutional  
          under the Equal Protection Clause.  The USDC Western District of  
          Kentucky (USDC KY), in Cecil v. Duck Head Apparel Co. (1995,  
          found that the Kentucky statute was a violation of equal  
          protection because it subjected an out-of-state " principal"  
          (same definition as the Pennsylvania law above) to a penal  
          statue from which in-state principals were exempt.  The USDC KY  
          also noted that the in-state principal should have equal  
          responsibility and equal liability with regards to written  
          contracts for employees paid on commission.  


          Proponents argue that requiring written contracts in the  
          specific instance of commission-based compensation employment  
          provides clarity and protection to both the employer and the  
          employee.  By prohibiting oral contracts and requiring that a  
          commission-based work contract be clearly written, the  
          proponents believe that this bill lessens the probability of  
          unnecessary litigation, as well as ensures that the existing  
          law, which is completely unenforceable, does not provide a "trap  
          for the unwary" and cast the illusion of protection, rather than  
          actually provide it.

          The California Employment Law Council (CELC) argues that this  
          bill would impose a statute of frauds requirement of a written  
          contract on all commission agreements in California.  CELC  
          states that it understands that the need for the bill arose when  
          a federal trial court declared existing Labor Code Section  


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          2751unconstitutional, because it imposed a written contract  
          requirement on out-of-state companies, but not on employers with  
          a physical presence in California.  They contend that while it  
          is possible to imagine why such a requirement might be contained  
          in Labor Code Section 2751 with respect to employers with no  
          permanent and fixed place of business in California, for nearly  
          40 years, California employers and employees have operated  
          without such a requirement and there is no compelling need to  
          extend the requirement to every employer in California.  CELC  
          also states that violations are subject to the Private Attorney  
          General Act (PAGA), for violations of the Labor Code. 

          CELC states that it understands that written commission  
          agreements represent good practice.  However, that is not a  
          reason to impose a new requirement of law on employers where  
          there has not been a problem.  Fundamentally, they do not  
          believe that present law in this area requires any legislative  


          California Conference Board of the Amalgamated Transit Union
          California Conference of Machinists
          California Employment Lawyers Association
          California Labor Federation, AFL-CIO
          California Teamsters Public Affairs Council
          Conference of California Bar Associations (sponsor)
          Consumer Attorneys of California
          Engineers and Scientists of California, IFPTE Local 20
          International Longshore and Warehouse Union
          Professional and Technical Engineers, ITPTE Local 21
          UNITE HERE!
          United Food and Commercial Workers Union, Western States Council

          California Employment Law Council

          Analysis Prepared by  :    Shannon McKinley / L. & E. / (916)  


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