Dec 21

The Write Choice: Many Salesperson Employment Contracts Must Be in Writing

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Many contracts aren’t worth the paper they’re written on. So imagine a contract that isn’t in writing at all. Historically, the lack of a requirement that all employment contracts be in writing allowed employers to unilaterally change the terms of their salespersons’ oral employment contracts and later deny that they changed anything. This was particularly problematic for commission-only salespersons, who would jump through flaming hoops to earn commissions, only to wind up with nothing. Fortunately, employment contracts where the “contemplated method of payment” of the employee “involves commissions” must now be in writing.

The Writing Requirement for Salesperson Employment Contracts

Labor Code section 2751 provides that any employer who wishes to form a contract with an employee for the latter to render “services” within California must do two things if the contract contemplates that the employee’s compensation will “involve[] commissions”: (1) get the contract in writing; and (2) set forth the “method” by which the employer will compute and pay the commissions. ((Lab. Code §2751(a).)) No longer can an employer move the goal posts. The contract must set forth all the conditions for earning commissions. The phrase “involves commissions” suggests that Section 2751 applies to employees who work solely on commission and employees who receive commissions on top of their base pay.

Moreover, Section 2751 requires that the employer must both: (1) give a signed copy of the contract to every employee who is a party to the contract; and (2) obtain a signed “receipt” for the contract from every employee. ((Lab. Code §2751(b).)) In the case of a contract that expires and where the parties nevertheless continue to work under the terms of the expired contract, the contract terms are presumed to remain in full force and effect until the parties supersede the contract or one of the parties terminates the employment. ((Id.)) In other words, an employer can fire an employee for refusing to sign a one-sided contract, but he can’t secretly change the terms of the contract behind the employee’s back.

The Name Game: Commissions vs. Bonuses (and Why the Difference Matters)

Section 2751 only applies to salesperson employment agreements where the method of compensation involves “commissions.” Section 2751 clarifies that the term “commission” has the meaning set forth in Labor Code section 204.1: “Commission wages are compensation…for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.” For a wage to be a “commission,” then, the employee must prove two things: (1) the wage is for the sale of his employer’s property or services; and (2) the wage is based proportionately on the amount or value of such property or services.

For an employee to be in “sales,” he must persuade a customer to part with his money. ((Muldrow v. Surrex Solutions Corp., 208 Cal.App.4th 1381 (2012).)) For example, a mechanic usually isn’t in sales because he doesn’t usually persuade customers to let him fix their cars. He renders, rather than sells, a service. Thus, any compensation he earns for fixing a car is a bonus or piece rate, but in no case is it a commission. ((Keyes Motors, Inc. v. DLSE, 197 Cal.App.3d 557 (1987).)) His employer wouldn’t have to comply with Section 2751. That doesn’t mean that everyone who sell his employer’s property or services is in sales. For example, a McDonald’s cashier isn’t in sales just because he rings up an order or even asks “Would you like fries with that?”

Even if an employee’s wage is for sales of property or services, it must be based proportionately on the amount or value of such property or services. In Harris v. Investor’s Business Daily, Inc., 138 Cal.App.4th 28 (2006), the employees, telemarketers for Direct Marketing Specialists, Inc. (DMSI), sold customers subscriptions to Investor’s Business Daily (IBD). The employees received a certain number of points for selling certain types of subscriptions (e.g., 0.25 points for a 13-week subscription). The value of those points rose as the employees earned more points. For example, an employee earned $15.80 per point for the first 9.99 points, $22.30 per point for the next 10 to 16.99 points, etc.

The employees sued DMSI and IBD for, among other things, non-payment of overtime. In response, DMSI and IBD argued the employees were inside salespersons and therefore exempt from overtime. The Court of Appeal disagreed and noted the point values weren’t proportionate to the subscription prices. For example, the point values for selling a six-month subscription could be higher than the point values for selling a one-year subscription if the former was worth more “points” than the latter. The Court thus held that the point values, having nothing to do with subscription prices, couldn’t be commissions. Thus, the telemarketers weren’t inside salespersons.

The difference between commissions and other incentives is important because Section 2751 only applies to commissions. Section 2751 excludes non-commission forms of incentive pay from the definition of a “commission”: (1) short-term productivity bonuses (e.g., such as those that retail clerks earn); (2) temporary, variable incentive payments that “increase, but don’t decrease,” payment under a written contract; and (3) bonus and profit-sharing plans, unless the employer offers to pay a fixed percentage of sales or profits as compensation for future work (as opposed to a 401(k), which is compensation for a person’s employment, rather than for the completion of a sale). ((Lab. Code §2751(c).))

Ben Rothman, Esq.

Ben Rothman is a Los Angeles-based attorney practicing in the areas of personal injury, employment, and workers' compensation on a "no recovery, no fee" basis. Call him at (424) 465-2948 for a free, no-obligation consultation.