California Labor Code Section 2751 requires employers to provide commission agreements in writing, specifying the method by which commissions are both computed and paid.

The agreement must be signed by both the employer and the employee, and each employee must receive a copy of his/her signed agreement. If the agreement expires and the employee continues working for the employer, the terms of the expired contract are presumed to remain in effect until a new agreement is in place. When you do write that new agreement, be sure to specify that the new agreement supersedes prior agreements.

It is important to be very specific in the agreement as to how the commission is earned, whether it is earned at one time or as specific events occur, and what happens when the employee leaves before conditions to earning the complete commission have occurred. For example, many firms condition payment of commission on the company itself being paid by the customer, such that the sales person shares the credit risk. If that’s your policy, but it isn’t in a written agreement, you lose, and can be liable for repayment to the sales rep.

And what if a commission earned by an employee is held back because the customer hasn’t yet paid your invoice, the employee resigns, and then the customer pays a couple of weeks later? Is the now-departed employee eligible to receive his commission once the customer paid?

It is also important to address, preferably as part of consultation with legal counsel, how commissions may (or may not) be affected when an employee is on a protected leave of absence, such as pregnancy disability leave or family medical leave. Each business will be different, so it is important to prepare the agreement with your particular business requirements in mind. “Off-the-shelf” agreements can cause more confusion and problems than having no agreement at all, if you’re not careful.

While the law requires you to have a written commission agreement, there is no legal requirement to have a written employment contract or agreement. The definition of “commissions” and the use of employment contracts or agreements can cause confusion.

Another important issue in drafting a legally-required written commission agreement can arise if you have a “bonus plan” for any employees. Depending on how it’s written, it may also qualify as a “commission plan.” So consult your corporate counsel to get an assessment of whether your “bonus plan” needs to be documented as a type of “commission plan.”

Our recommendation: don’t spend the time and energy thinking about it, just “do it.” Bonus plans should be documented in writing, in a clear and comprehensive manner, regardless of whether it is theoretically required or not required, and without some slick analysis of whether it is technically analogous to a “commission plan.” Better to use a little energy now to minimize the chances of later dispute.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.