BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                  AB 1396|
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                                 THIRD READING


          Bill No:  AB 1396
          Author:   Assembly Labor and Employment Committee
          Amended:  5/26/11 in Assembly
          Vote:     21

           
           SENATE LABOR & INDUST. RELATIONS COMMITTEE  :  5-1, 6/22/11
          AYES:  Lieu, DeSaulnier, Leno, Padilla, Yee
          NOES:  Wyland
          NO VOTE RECORDED:  Runner

           SENATE JUDICIARY COMMITTEE  :  4-1, 7/5/11
          AYES:  Evans, Blakeslee, Corbett, Leno
          NOES:  Harman
           
          ASSEMBLY FLOOR  :  51-28, 5/31/11 - See last page for vote


           SUBJECT  :    Employment contract requirements

           SOURCE  :     Conference of California Bar Associations


           DIGEST  :    This bill requires that all employers provide a 
          written contract to employees who are paid commission.  
          Specifically, (1) declares legislative intent of this bill, 
          in light of the Federal District Court (Northern District) 
          decision of  Lett v. Paymentech  , to restore the employee 
          protections that had been in effect by making Labor Code 
          Section 2751 apply equally to employers with a fixed place 
          of business in the state and to employers who do not have a 
          fixed place of business in the state, (2) requires all 
          employers, by January 1, 2013, to provide a written 
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          contract, with specified details, to employees who are paid 
          commission, (3) adds when a contract expires and where the 
          parties continue to work under the terms of the expired 
          contract, the contract terms are presumed to remain in full 
          force and effect until the contract is superseded or 
          employment is terminated by either party, and (4) repeals 
          the provision of law which states that an employer shall be 
          liable to the employee in a civil action for treble damages 
          when an employer does not provide a written commission 
          contract, as specified.

           ANALYSIS  :    Existing law and case law define 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 ÝLC] Section 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.  (LC Section 2750)

          Existing law requires a written contract of employment if 
          the following conditions are met: 

          1. The employer has no permanent and fixed place of 
             business in California; 

          2. The employer in entering into a contract of employment 
             with an employee for services to be rendered within 
             California; and 

          3. 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:

          1. Short term productivity bonuses such as are paid to 
             retail clerks; or

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          2. 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.

          (LC Section 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.  (LC Section 2752)

          This bill requires that all employers provide a written 
          contract to employees who are paid commission.  
          Specifically, this bill:

          1. Declares legislative intent of this bill, in light of 
             the  Lett v. Paymentech  court decision, to restore the 
             employee protections that had been in effect by making 
             LC Section 2751 apply equally to employers with a fixed 
             place of business in the state and to employers who do 
             not have a fixed place of business in the state.

          2. Requires all employers, by January 1, 2013, to provide a 
             written contract, with specified details, to employees 
             who are paid commission.

          3. Adds when a contract expires and where the parties 
             continue to work under the terms of the expired 
             contract, the contract terms are presumed to remain in 
             full force and effect until the contract is superseded 
             or employment is terminated by either party, and 

          4. Deletes the provision of law which states that an 
             employer shall be liable to the employee in a civil 
             action for treble damages when an employer does not 
             provide a written commission contract, as specified.

           Comments
           
           Need for this bill  .  LC Sections 2751 and 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 

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          both code sections.  In  Lett v. Paymentech  (N.D. Cal. 1999) 
          81 F.Supp.2d 992, the Court found that LC Section 2751 
          violates the federal constitution, specifically by 
          violating the equal protection clause and commerce clause, 
          thereby making the code section unenforceable.  

          This bill 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.

           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 thereof."  Therefore, commissions would be 
          the wages, rather than simply on top of the wages.

          Prior to these court cases, LC Section 2751 contained a 
          similar definition of how a commission was different from a 
          bonus.  This bill does not impact the existing definition 
          of "bonus" or "commission" as defined in the DLSE manual or 
          existing law.

           Prior Legislation
           
          SB 1370 (Ducheny), Session of 2009-10, was 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. 
           The veto message read:

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            "This bill would require that beginning in 2012, all 
            employment contracts for services rendered within 
            California in which the method of payment involves 
            commissions, be in writing, and set forth the method by 
            which the commissions shall be computed and paid.

            "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."

          AB 836 (Frew), Chapter 1088, Statutes of 1963, requires 
          that out-of-state employers provide a written contract 
          under the conditions discussed above, as well as creates a 
          penalty for failing to provide such a written contract.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  No   
          Local:  No

           SUPPORT  :   (Verified  7/7/11 )

          Conference of California Bar Associations (source)
          California Employment Lawyers Association
          California Labor Federation, AFL-CIO

           OPPOSITION  :    (Verified  7/7/11)

          California Employment Law Council

           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 

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          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) is opposed to this bill.  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.  
           

           ASSEMBLY FLOOR  :  51-28, 5/31/11
          AYES:  Alejo, Allen, Ammiano, Atkins, Beall, Block, 
            Blumenfield, Bonilla, Bradford, Brownley, Buchanan, 
            Butler, Charles Calderon, Campos, Carter, Cedillo, 
            Chesbro, Davis, Dickinson, Eng, Feuer, Fong, Fuentes, 
            Furutani, Galgiani, Gatto, Gordon, Hall, Hayashi, Roger 
            Hernández, Hill, Hueso, Huffman, Lara, Bonnie Lowenthal, 
            Ma, Mendoza, Mitchell, Monning, Pan, Perea, V. Manuel 
            Pérez, Portantino, Skinner, Solorio, Swanson, Torres, 
            Wieckowski, Williams, Yamada, John A. Pérez
          NOES:  Achadjian, Bill Berryhill, Conway, Cook, Donnelly, 
            Fletcher, Beth Gaines, Garrick, Grove, Hagman, Halderman, 
            Harkey, Huber, Jeffries, Jones, Knight, Logue, Mansoor, 
            Miller, Morrell, Nestande, Nielsen, Norby, Olsen, Silva, 
            Smyth, Valadao, Wagner
          NO VOTE RECORDED:  Gorell


          PQ:kc  7/7/11   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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