California law requires that employee commission agreements be written. This protects, not only the employee, but also the employer and is a sound preventive practice to avoid disputes and litigation regarding compensation. California employers should review their agreements and policies and ensure all incentive compensation agreements, including commission agreements, are in writing and clearly address critical issues such as when the incentive is earned and how the incentive will be treated at termination of the employment relationship.
Labor Code Section Requires Commissions Agreements Be In Writing
According to California Labor Code Section 2751, a contract of employment involving commissions needs to be in writing and state the services to be rendered, the contemplated method of payment and the method by which the commission should be dealt with.1 The statute refers to each employee who is involved in commissions and requires a signed receipt from each employee.2 If the contract between both parties expires, the contract nevertheless remains in full effect until it is superseded or the employment relationship is terminated by either party.3 Commissions do not generally include: short-term productivity bonuses, temporary variable incentive payments that increase, or other bonus or profit-sharing plans, unless the incentive is a fixed percentage of sales or profits.4
Failure To Pay Commissions Properly Can Result In Class Action And PAGA Claims
According to California Labor Code Section 203, statutory penalties are imposed when an employer willfully fails to pay final wages, in accordance with sections 201, 201.3, 201.5, 201.6, 201.8, 201.9, 202, and 205.5. Under the statute, the wages of the employee continue as a penalty from the due date thereof at the same rate until paid or until an action therefor is commenced, to a maximum of 30 days.5 Any employee who secretes or absents themselves to avoid payment of final wages or refuses to receive payment when fully tendered to them, including any penalty in this section, is not entitled to any benefit.6 A suit may be filed for those enumerated penalties.7 Equally, California Labor Code Section 2699.5 provides a list of labor code section violations for which employees can bring Private Attorney General Act (PAGA) claims.8
IBM Sales Reps’ Commission Caps Lawsuit and Settlement
A recent California court case illustrates the importance of properly memorializing commission incentive compensation and following the established commission plan. The suit arises out of allegations that IBM failed to keep promises that commissions would not be capped. IBM has agreed to pay $4.75 million to settle claims that it failed to pay 1,500 sales representatives who lived in California when working on commission between November 4, 2015 and the date of preliminary approval of settlement by the court. This suit also covers a subclass of about 60 employees who lived in California for the same time period when the commissions were improperly capped, but were not directly shorted commissions. In addition, there is a PAGA settling group consisting of those who lived in California while working for IBM on commission incentives between September 5, 2020, through the date of the preliminary approval.
IBM agreed to pay $4.53 million to class members and their counsel, with $10,000 each going to class representatives Mark Briggs and Mark Comin, along with $200,000 in PAGA penalties. The joint motion for preliminary approval of the class settlement allowed for each class member to receive $300, regardless of how long they worked for IBM.
The motion seeking U.S. District Judge James Donato’s approval comes three years after IBM employee sued the company for violating California’s labor laws by “baiting” and “switching” the compensation plan and leading employees to believe there was no commission cap, but then cutting employee payouts on major money deals. IBM was also accused of not providing its sales representatives written contracts as required by California Labor Code section 2751.9
Mark Comin, employee at IBM from January 2001 to February 2018, claimed three occasions when IBM did not pay his full commission for closing a large transaction. For reference, in one instance IBM credited him with more than $3 million in commissions, then retroactively reversed 90% of the credit with no explanation. Comin points to 29 similar incidents raising similar claims against IBM.
Referring back to the importance of both California Labor Code Section 2751 and California Labor Code Section 203, it is mandatory for there to be a written contract for commissions between IBM and the employees that work for IBM to set forth not only a written instrument that both parties must uphold, but equally set the methods by which the commission should be dealt with. The failure of the employer, in this case IBM, to detail the way commissions are earned by the employees and to lay the detail in an explicit and written format was to the employer’s detriment. Likewise, the expiration of a commission agreement, without clear termination language, will provide no meaningful defense to these claims. Section 2751 provides that regardless of a contract’s expiration, “the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.”10
Under section 203, employers who fail to pay final wages are liable for the wages of the employee as a penalty from the due date thereof at the same rate until paid or until an action therefor is commenced, to a maximum of 30 days.11 IBM now not only has to pay two classes of employees, including employees who never had their commissions reduced. Additionally, similar claims against IBM are being raised across the country, creating vulnerability and exposure to IBM as an employer. A hearing on the settlement is tentative for October 6, 2022.
Conclusion
An employer may consider the following to prevent these detrimental outcomes: (i) always have specificity, in writing, of the services to be rendered and the contemplated method of payment of the employee that include commissions; (ii) if commissions are a part of the employee’s compensation, make sure to identify the conditions for earned commissions and to clarify commission payment at termination; (iii) never willfully withhold required payments to employees – honor the compensation agreement to employees.
1 Cal. Lab. Code § 2751.
2 Id.
3 Id.
4 Id.
5 Cal. Lab. Code § 203.
6 Id.
7 Id.
8 Cal. Lab. Code § 2699.5.
9 Cal. Lab. Code § 2751, supra note 1.
10 Id.
11 Cal. Lab. Code § 203, supra note 5.