BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 1396| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ 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 CONTINUED AB 1396 Page 2 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terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party, and (4) repeals the provision of law which states that an employer shall be liable to the employee in a civil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 CONTINUED AB 1396 Page 3 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 CONTINUED AB 1396 Page 4 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: CONTINUED AB 1396 Page 5 "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 CONTINUED AB 1396 Page 6 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 **** END **** CONTINUED AB 1396 Page 7 CONTINUED