BILL ANALYSIS SB 1370 Page 1 Date of Hearing: June 23, 2010 ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT 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 SB 1370 Page 2 writing. 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. SB 1370 Page 3 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. ARGUMENTS IN SUPPORT : 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. ARGUMENTS IN OPPOSITION : 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 SB 1370 Page 4 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 correction. REGISTERED SUPPORT / OPPOSITION : Support 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 Opposition California Employment Law Council Analysis Prepared by : Shannon McKinley / L. & E. / (916) 319-2091 SB 1370 Page 5