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