California Labor Rules to Ignore at Your Own Peril – 5th Rule: Commission Structure Letters

This is an ongoing series looking at the nine California Labor Rules to Ignore at Your Own Peril. Today we’ll discuss Commission Structure Letters.

There’s a new rule on the horizon for commissioned sales in California: as of January, 2013, the specifics of the commission structure must be laid out in writing. Previously, commission structure letters were only required of employers who have “no fixed and permanent place of business in the state,” but now the all employers who pay commissions will be subject to the rule.

The commission structure letter must be given to any employee for which “the contemplated method of payment of the employee involves commissions,” and specifies that it shall “set forth the method by which the commissions shall be computed and paid.”

Employers must sign this agreement, and obtain a signed receipt from each employee they give it to. If the agreement expires without termination or a new agreement being put into place, those commission terms remain in effect.

Letters such as these are easily configurable in an in-house payroll system, because you control your payroll data and can add and modify fields as needed to comply with new regulations. Our clients who pay commissions already had fields for commission rates and other variables, so it was just a question of creating a new payroll report.

External requirements, such as the employee providing a signed receipt as proof that they were given the written commission agreement, aren’t driven by payroll. However, tracking information like this is part and parcel of an integrated HR system, protecting you from costly oversights.

As noted above, this is an expansion of an older rule which was only imposed upon companies without a permanent office in the state, which was shot down by the courts because it targeted out-of-state companies only. The legislature wanted to preserve that requirement, and determined that the best way to do so was to place it on even more companies than before. However, there is one way that this new law is better: failing to comply with the old rule meant that a violator was subject to triple damages; that language was removed this time around.

If you’d like to find out if there are other labor rules you’re overlooking, in California or elsewhere, contact us for a consultation on your processes and the pitfalls of your local laws.

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