BILL ANALYSIS Ó
Senate Committee on Labor and Industrial Relations
Ted W. Lieu, Chair
Date of Hearing: June 22, 2011 2011-2012 Regular
Session
Consultant: Gideon L. Baum Fiscal:No
Urgency: No
Bill No: AB 1396
Author: Assembly Committee on Labor and Employment
Version: As Amended May 26, 2011
SUBJECT
Employment contract requirements.
KEY ISSUE
Should the Legislature require that all commission-based
employment contracts be in writing?
PURPOSE
To require that employees who are paid by commission are
provided with a written contract on the terms and conditions of
employment.
ANALYSIS
Existing law and case law defines a commission as compensation
paid to any person for services rendered in the sale of such
employer's property or services and based proportionately upon
the amount or value thereof. (Labor Code § 204.1; Keyes Motors
v. DLSE (1987) 197 Cal.App.3d 557)
Existing law defines a contract of employment as a contract by
which one an employer engages an employee to do something for
the benefit of the employer or a third person. (Labor Code §
2750)
Existing law requires a written contract of employment if the
following conditions are met:
a) The employer has no permanent and fixed place of
business in California;
b) The employer in entering into a contract of employment
with an employee for services to be rendered within
California; and
c) The contemplated method of payment of the employee
involves commissions, unless excluded.
Under these conditions, the contract must be in writing and must
set forth the method by which the commissions shall be computed
and paid.
The commissions excluded are:
a) Short term productivity bonuses such as are paid to
retail clerks; or
b) Bonus and profit-sharing plans, unless there has been an
offer by the employer to pay a fixed percentage of sales or
profits as compensation for work to be performed.
(Labor Code § 2751)
Existing law holds any employer who fails to contract with an
employee as required to be liable to the employee in a civil
action for triple damages. (Labor Code § 2752)
This bill would make legislative findings and declarations as
the need to amend Labor Code § 2751 due to Lett v. Paymentech
(N.D. Cal. 1999) 81 F.Supp.2d 992 in order to restore employee
protections that had been in effect.
This bill would extend the conditions necessitating a written
contract of employment to all employers in the State of
California.
This bill would repeal the provision holding an employer who
violates this requirement liable in a civil action for triple
damages.
Hearing Date: June 22, 2011 AB 1396
Consultant: Gideon L. Baum Page 2
Senate Committee on Labor and Industrial Relations
COMMENTS
1. Need for this bill?
Labor Code §§ 2751 & 2752 were enacted in 1963 to prevent
out-of-state employers from deceiving employees compensated
through commissions by requiring a written employment
contract. While neither statute has been changed since that
time, court cases have invalidated both code sections. In
Lett v. Paymentech (N.D. Cal. 1999) 81 F.Supp.2d 992, the
Court found that Labor Code § 2751 violates the federal
constitution, specifically by violating the equal protection
clause and commerce clause, thereby making the code section
unenforceable.
AB 1396 seeks to follow the lead of Georgia, Louisiana,
Maryland, and Tennessee in requiring that all employers put
commission-based employment contracts in writing. The author
believes that such measures are needed in order to protect
employees from fraud and abuse, as well as protect employers
from unnecessary litigation resulting from vague oral
contracts.
2. Bonus versus Commission:
Using guidance from several court cases, the Division of Labor
Standards Enforcement (DLSE) distinctly defines how a "bonus"
is separate and distinct from a "commission". Specifically,
the DLSE defines a "bonus" as "money promised to an employee
in addition to (sic) the monthly salary, hourly wage,
commission or piece rate usually due as compensation." This
can include salespeople hitting specific targets, or even a
gratuity, but must be in addition to regular wages.
Commissions, on the other hand, are defined both in code and
by the DLSE manual as "Compensation paid to any person for
services rendered in the sale of such employer's property or
services and based proportionately upon the amount or value
Hearing Date: June 22, 2011 AB 1396
Consultant: Gideon L. Baum Page 3
Senate Committee on Labor and Industrial Relations
thereof." Therefore, commissions would be the wages, rather
than simply on top of the wages.
Prior to these court cases, Labor Code § 2751 contained a
similar definition of how a commission was different from a
bonus. AB 1396 does not impact the existing definition of
"bonus" or "commission" as defined in the DLSE manual or
existing law.
3. Proponent Arguments :
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.
4. Opponent Arguments :
The California Employment Law Council (CELC) is opposed to AB
1396. CELC notes that the existing silence on
commission-based contracts in code appears to have worked
successfully for nearly 50 years, and is concerned that
requiring additional reporting requirements on employers could
lead to increases in litigation. Fundamentally, CELC believes
that existing law is sufficient.
5. Prior Legislation :
SB 1370 (Ducheny) of 2010 is identical to this bill, with the
exception of the repeal of the treble damages for employers
who violate the employment law provisions. SB 1370 was vetoed
by Governor Schwarzenegger.
AB 836 (Frew), Statutes of 1963, Chapter 1088, requires that
out-of-state employers provide a written contract under the
conditions discussed above, as well as creates a penalty for
Hearing Date: June 22, 2011 AB 1396
Consultant: Gideon L. Baum Page 4
Senate Committee on Labor and Industrial Relations
failing to provide such a written contract.
SUPPORT
Conference of California Bar Associations (CCBA) (Sponsor)
California Employment Lawyers Association (CELA)
California Labor Federation, AFL-CIO
OPPOSITION
California Employment Law Council (CELC)
Hearing Date: June 22, 2011 AB 1396
Consultant: Gideon L. Baum Page 5
Senate Committee on Labor and Industrial Relations