BILL ANALYSIS
SB 1370
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Date of Hearing: June 23, 2010
ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT
Sandre Swanson, Chair
SB 1370 (Ducheny) - As Introduced: February 19, 2010
SENATE VOTE : 22-7
SUBJECT : Employment contract requirements.
SUMMARY : Requires that all employers provide a written
contract to employees who are paid commission. Specifically,
this bill amends Section 2751 of the Labor Code to require all
employers to provide a written contract, with specified details,
to employees who are paid commission.
EXISTING LAW :
1)Requires employers with no permanent and fixed place of
business in California to provide written contracts to
employees, when the method of payment involves commission,
which specifies the way in which the commissions will be
calculated and paid.
2)Subjects employers who fail to comply with the written
contract requirement to civil action for triple damages.
FISCAL EFFECT : Unknown
COMMENTS : According to the author, this bill eliminates an
unconstitutional inconsistency in the California Labor Code in
which employers residing and conducting business in the state
are not required to put employee commission contracts in
writing. The author notes that the United States District court
ruled in Lett v. Paymentech, Inc. (1999) that existing code and
practice violates the Commerce Clause and the Equal Protection
Clause of the United Sates Constitution. All employers
conducting business in the state must conform to the same
commission contract requirements. The author states that while
the court decision addresses the unconstitutional practice and
current practice follows the court decision, California's Labor
Code does not currently reflect the court decision. The author
asserts that this bill updates Labor Code to reflect
constitutional practice by requiring all employers, regardless
of their place of residence to have commission contracts in
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writing.
A commission, as defined in Section 204.1 of the Labor Code, is
compensation paid to any person for services rendered in the
sale of such employer's property or services and base
proportionately upon the amount or value there of. According to
the Division of Labor Standards Enforcement (DLSE) Enforcement
Policies and Interpretation Manual (Manual), compensation that
is based on a percentage of sale is considered commission. In
contrast, however, a compensation plan which pays employees for
the number of pieces of goods finished, the number of
appointments made or the number of procedures completed, is
based on a piece rate.
The term "commission wages" was defined in 1988 by case law
(Keys Moters, Inc. vs. DLSE). The court found that commissions
arise from the sale of product, not the making of a produce or
the rendering of service. According to the DLSE Manual, in
order to be a commission, compensation must be a percentage of
the price of the product or service which is sold. In 1999, the
California Supreme Court ruled that the Labor Code definition of
commission applies to all employees receiving commission.
For a compensation to qualify as commission, it must meet the
requirements of a" commission wage" as set out in the Keys
Motors case (see above). Bonuses however are usually based on
reaching a minimum amount of sales or making a minimum number of
pieces rather than based on the price of a product or service.
Case Law
In Lett vs. Paymentech, Inc., the United States District Court
(USDC) found both California Labor Code Section 2751, which
requires out of state employers to enter into a written contract
with commissioned employees and Labor Code Section 2752, which
allows employees to seek damages when the employer fails to
comply, to be unconstitutional. According to the USDC, Labor
Code Section 2751 is discriminatory because it does not apply to
employers with a permanent place of business within California,
but subjects those outside of the state to damages. The court
notes that if the goal is to protect employees, then all
employers should provide a written contract regardless of their
fixed and permanent place of business.
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Laws similar to the California's current statute have also been
deemed unconstitutional because they were found to be either a
violation of the Commerce Clause or a violation of the Equal
Protection Clause of the United States Constitution. For
example, a Pennsylvania statute that required "principals" -
defined as "any person who does not have a permanent or fixed
place of business in Pennsylvania - to enter into written
contracts with any employees paid on commission was deemed
unconstitutional under the Commerce Clause. In 1993, the USDC
Western District of Pennsylvania found, in Palmer-Lucas v.
Martin's Herend Imports Inc., that, while the statute had a
legitimate purpose to protect in-state sales representatives
from abusive behaviors of employers, there was not valid reason
to exempt in-state employers. In Cecil v Duck Head Apparel Co.
(1995) a Kentucky, a statue with language similar to that of the
Pennsylvania law mentioned above was deemed unconstitutional
under the Equal Protection Clause. The USDC Western District of
Kentucky (USDC KY), in Cecil v. Duck Head Apparel Co. (1995,
found that the Kentucky statute was a violation of equal
protection because it subjected an out-of-state " principal"
(same definition as the Pennsylvania law above) to a penal
statue from which in-state principals were exempt. The USDC KY
also noted that the in-state principal should have equal
responsibility and equal liability with regards to written
contracts for employees paid on commission.
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 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) argues that this
bill would impose a statute of frauds requirement of a written
contract on all commission agreements in California. CELC
states that it understands that the need for the bill arose when
a federal trial court declared existing Labor Code Section
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2751unconstitutional, because it imposed a written contract
requirement on out-of-state companies, but not on employers with
a physical presence in California. They contend that while it
is possible to imagine why such a requirement might be contained
in Labor Code Section 2751 with respect to employers with no
permanent and fixed place of business in California, for nearly
40 years, California employers and employees have operated
without such a requirement and there is no compelling need to
extend the requirement to every employer in California. CELC
also states that violations are subject to the Private Attorney
General Act (PAGA), for violations of the Labor Code.
CELC states that it understands that written commission
agreements represent good practice. However, that is not a
reason to impose a new requirement of law on employers where
there has not been a problem. Fundamentally, they do not
believe that present law in this area requires any legislative
correction.
REGISTERED SUPPORT / OPPOSITION :
Support
California Conference Board of the Amalgamated Transit Union
California Conference of Machinists
California Employment Lawyers Association
California Labor Federation, AFL-CIO
California Teamsters Public Affairs Council
Conference of California Bar Associations (sponsor)
Consumer Attorneys of California
Engineers and Scientists of California, IFPTE Local 20
International Longshore and Warehouse Union
Professional and Technical Engineers, ITPTE Local 21
UNITE HERE!
United Food and Commercial Workers Union, Western States Council
Opposition
California Employment Law Council
Analysis Prepared by : Shannon McKinley / L. & E. / (916)
319-2091
SB 1370
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