BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 1396 (Committee on Labor and Employment)
As Amended May 26, 2011
Hearing Date: July 5, 2011
Fiscal: No
Urgency: No
TW
SUBJECT
Employment Contract Requirements: Commissions
DESCRIPTION
Existing law requires an out-of-state employer paying employees
through commissions to maintain a written contract evidencing
the method by which the commissions shall be computed and paid.
This bill would extend this written contract requirement to
in-state employers.
Existing law provides that the out-of-state employer that fails
to maintain such contract is subject to civil liability with
treble damages. This bill would repeal this provision.
BACKGROUND
In 1963, the Legislature enacted AB 836 (Frew, Ch. 1088, Stats.
1963), which requires that an out-of-state employer paying a
California employee through commissions must provide to the
employee a written contract setting forth the method by which
the commissions will be computed and paid to the employee.
(Lab. Code Sec. 2751.) AB 836 also established a treble damages
penalty against an employer for failing to provide such a
written contract. (Lab. Code Sec. 2752.)
However, these provisions of AB 836 were held unconstitutional
in Lett v. Paymentech, Inc. (N.D.Cal. 1999) 81 F.Supp.2d 992
because these statutes apply unequally to out-of-state employers
in favor of in-state employers and discriminate against
out-of-state corporations in violation of the Commerce Clause
and Equal Protection Clause. This bill is a response to the
(more)
AB 1396 (Committee on Labor and Employment)
Page 2 of ?
holding in Lett.
This bill is substantially similar to SB 1370 (Ducheny, 2010),
which was vetoed by Governor Schwarzenegger.
This bill, sponsored by the Conference of California Bar
Associations, would require all companies, in-state and
out-of-state, paying employees with commissions to have a
written contract evidencing such arrangement, as specified.
This bill also would repeal the ability to obtain an award of
treble damages for a violation of this written contract
requirement.
This bill was heard by the Senate Labor and Industrial Relations
Committee on June 22, 2011 and passed out on a vote of 5-1.
CHANGES TO EXISTING LAW
1.Existing law defines an employment contract to mean a contract
by which one, who is called the employer, engages another, who
is called the employee, to do something for the benefit of the
employer or a third person. (Lab. Code Sec. 2750.)
Existing law provides that whenever any employer who has no
permanent and fixed place of business in California enters
into an employment contract with an employee for services to
be rendered within California and the contemplated method of
payment of the employee involves commissions, the contract
shall be in writing and shall set forth the method by which
the commissions shall be computed and paid. (Lab. Code Sec.
2751.)
Existing law requires the employer to give a signed copy of
each such contract to every employee who is a party thereto
and to obtain a signed receipt for the contract from each
employee. (Lab. Code Sec. 2751.)
Existing law provides that the term "commissions" does not
include short term productivity bonuses or 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. (Lab. Code Sec. 2751.)
Existing case law has held that the requirement for an
out-of-state employer to comply with written commission
employment contract requirements is unconstitutional because,
AB 1396 (Committee on Labor and Employment)
Page 3 of ?
by treating out-of-state employers differently than in-state
employers, the requirement violates the Commerce Clause and
Equal Protection Clause under the Fourteenth Amendment of the
United States Constitution. (Lett v. Paymentech, Inc. (N.D.
Cal. 1999) 81 F.Supp.2d 992, 998, 1001.)
This bill would extend to include in-state employers the
requirement of out-of-state employers to provide an employee
with a written contract setting forth the method by which
commissions shall be computed and paid.
This bill would require out-of-state and in-state employers to
comply with this requirement by January 1, 2013.
2. Existing law provides that any employer who does
not employ an employee pursuant to a written contract as
required by Section 2751 shall be liable to the employee in a
civil action for triple damages. (Lab. Code Sec. 2752.)
This bill would repeal this provision.
COMMENT
1. Stated need for the bill
The author writes:
Currently, Labor Code ÝSection] 2751 appears to provide
protections to California citizens who enter into commission
contracts with out of state companies, by requiring such
commission contracts to be in writing and providing (in Labor
Code ÝSection] 2752) for treble damages for violation. These
protections are completely illusory, however, because Labor
Code ÝSection] 2751 was declared unconstitutional. . . . The
statute is therefore completely unenforceable, and its
continued presence in the statutes in its current form is a
trap for the unwary employee.
The Conference of California Bar Associations (CCBA), the
sponsor of this bill, writes:
Former Governor Schwarzenegger's veto message for SB 1370, the
predecessor to AB 1396, acknowledges the unconstitutionality
of Labor Code ÝSection] 2751 in its current form, but states
that the then-Governor did not believe the problem was
sufficiently widespread to justify "potentially unnecessary
AB 1396 (Committee on Labor and Employment)
Page 4 of ?
new burdens on all businesses employment persons in
California." . . . However, SB 1370 itself grew out of exactly
one such case, and there undoubtedly are more that have never
come to the Legislature's attention. No one can deny the
dangers of leaving invalid statutes in the codes, where they
can and do create a false sense of protection and security,
particularly when the cure is reasonable and universally
acknowledged as a wise, common-sense business practice
followed by virtually all California-based businesses.
2. Expanding the requirement of commission employment contracts
to address constitutionality issues
This bill would expand to in-state employers the existing
requirement of out-of-state employers to provide an employee
with a written contract setting forth the method by which
commissions shall be computed and paid. Existing law provides
that whenever any employer who has no permanent and fixed place
of business in California enters into an employment contract
with an employee for services to be rendered within California
and the contemplated method of payment of the employee involves
commissions, the contract shall be in writing and shall set
forth the method by which the commissions shall be computed and
paid. (Lab. Code Sec. 2751.)
In Letts v. Paymentech, Inc. (N.D. Cal. 1999) 81 F.Supp.2d 992,
the court held that the requirements under Labor Code Section
2751 were unconstitutional. The statute was held to be in
violation of the Commerce Clause because, on its face, the
statute applies only to out-of-state employers and consequently
burdens interstate commerce disproportionately in favor of
intrastate commerce. (Id at p. 998.) Further, the court held
the statute to be in violation of the Equal Protection Clause of
the Fourteenth Amendment because it severely burdens one class
of employers (out-of-state employers) while another class of
employers (in-state employers) is completely unburdened by the
statute. (Id. at 1001.)
CCBA argues that this bill "resolves the constitutionality issue
by removing the distinction between out-of-state and in-state
companies from Labor Code ÝSection] 2751, making all subject to
the requirement that all commission contracts be in writing. . .
." Further, the California Employment Lawyers Association, a
supporter of this bill, argues that "Ýb]y clarifying that all
commission contracts must be in writing, the rights and earnings
of all California employees are protected. Written contracts
avoid disputes between employers and employees regarding
AB 1396 (Committee on Labor and Employment)
Page 5 of ?
compensation, and prevent costly and time-consuming court
cases."
Accordingly, the author argues that, because the existing
statute has been declared unconstitutional, but employees paid
on commissions still need protection from unscrupulous
employers, this bill provides the best available option.
Instead of repealing the statute entirely and thereby
affirmatively removing these protections, this bill would
provide greater protection for all of California's employees,
whether hired by in-state or out-of-state employers.
3. Repeal of award of treble damages to address oppositions'
concerns
This bill would repeal the ability of an employee to be awarded
treble damages against an employer who fails to provide a
written contract detailing the method of computation of
commissions to be paid to the employee. Existing law provides
that an out-of-state employer who does not employ an employee
pursuant to a written contract detailing the method of
computation of commissions shall be liable to the employee in a
civil action for triple damages. (Lab. Code Sec. 2752.) The
Letts court held this statute to be in violation of the Commerce
Clause because it suffered the same constitutional deficiencies
as Labor Code Section 2751 by implication. (Id at p. 998.)
California Employment Law Council (CELC), an opponent of this
bill, argues that existing law for commission contracts has
worked well and additional reporting requirements could lead to
increased litigation. Further, CELC expressed concerned that
this bill, by requiring in-state employers to provide a written
commission contract with a treble damages penalty under existing
law for out-of-state employers, would subject in-state employers
to triple damage awards for failing to execute a commission
contract. Accordingly, this bill was amended to repeal the
statute that awards treble damages. This revision does not
remove an employee's ability to file a claim against an employer
who fails to provide the required written contract; rather, the
employee will just not be able to receive treble damages for the
employer's omission. The California Chamber of Commerce
(CalChamber) and the Civil Justice Association of California
(CJAC) were also opposed to the prior version of this bill, but
the recent amendments have moved both CalChamber and CJAC to
neutral positions.
AB 1396 (Committee on Labor and Employment)
Page 6 of ?
4. Governor Schwarzenegger's veto of SB 1370
This bill is substantially similar to the enrolled version of SB
1370 (Ducheny, 2010). In vetoing SB 1370, Governor
Schwarzenegger stated:
This bill addresses a federal district court decision which
held Labor Code section 2751 to be unconstitutional. However,
there is no indication that there is a widespread problem of
wage disputes resulting from the lack of written
commission-based employment contracts in California.
Therefore, the manner in which this bill remedies the existing
law's constitutional infirmity creates potentially unnecessary
new burdens on all businesses employing persons in California.
If it becomes apparent that there is an actual problem
arising from a lack of written commissioned-based contracts in
California, then it would be appropriate to revisit this
issue. At this time, however, there is no clear need for this
bill.
Support : California Employment Lawyers Association; California
Labor Federation
Opposition : California Employment Law Council
HISTORY
Source : Conference of California Bar Associations
Related Pending Legislation : None Known
Prior Legislation :
SB 1370 (Ducheny, 2010) See Background.
AB 836 (Frew, Ch. 1088, Stats. 1963) See Background.
Prior Vote :
Senate Labor and Industrial Relations Committee (Ayes 5, Noes 1)
Assembly Floor (Ayes 51, Noes 28)
Assembly Labor and Employment (Ayes 5, Noes 1)
**************
AB 1396 (Committee on Labor and Employment)
Page 7 of ?