It’s not only a good idea for companies to develop written commission agreements; in California it’s the law. Effective January 1, 2013, all employers must have written agreements for California employees who are compensated on a commission basis. Specifically, California law requires that commission agreements be in writing; set forth the method by which commissions will be computed and earned; employers must provide employees with a signed copy of the commission agreement; and employers must obtain signed receipt of the agreement from the employee acknowledging both receipt of, and agreement with, the commission program. Converting these deceptively simple requirements into a legally compliant commission agreement can be a significant undertaking. Ultimately, this task is worth the effort because it (you guessed it) minimizes confusion about when and how commissions are earned, which (you guessed it again) can reduce the risk of a legal dispute over a commission, particularly how to pay departing employees.
Like it or not, there are times when employment ends under circumstances that are less than ideal. Of all the points in the employment relationship, it is during the termination process when a former employee decides whether or not to become a future plaintiff. Research has shown that employees who feel disrespected during the termination process are much more likely to sue. And therein lays the importance of a severance agreement. A well-crafted severance agreement provides a softlanding for someone who is about to enter a time of uncertainty in his or her life. They help a former employee feel respected as they leave the company. And someone who feels respected is much less likely to consult a lawyer and/or sue. Severance agreements, however, are not without traps for the unwary. For example, federal law provides employees over the age of 40 with certain rights that must be codified in a severance agreement. There are also certain types of claims that an employee cannot waive as a condition of accepting a severance payment. No employer should present a severance agreement to an employee that has not first been vetted by an attorney. The headaches created by a poorly drafted severance agreement more than outweigh (and outcost) the legal fees you will incur in having an attorney review the agreement. Finally, although no severance agreement can completely inoculate your company from a lawsuit, a solid severance agreement sends a very clear message to potential plaintiff’s attorneys that this company (and its attorneys) will not be a pushover in litigation.
Optional: Arbitration Agreements
Much ink has been spilled about the pros and cons of arbitration agreements. Briefly, arbitration is a nonpublic forum for resolving legal disputes. Think of it as a private court. Arbitration provides a measure of confidentiality, informality, and efficiency that is missing in state and federal courts. It also removes the variable presented by having a jury (instead of a former judge or attorney) decide your case. Arbitration agreements with an enforceable class action waiver can also prevent against financially devastating class action lawsuits. All that said, arbitration is expensive. In California, the law requires the employer to pay for arbitration with former employees and good arbitrators will charge thousands of dollars per day for their services. We recommend that companies consider implementing arbitration agreements, especially with certain categories of employees who could band together to form a class (i.e., sales representatives, assistant managers, etc.). An experienced employment attorney can help your company decide if arbitration is a good risk-management strategy, draft and guide the implementation of arbitration agreements, and guide you through the process of moving a case from court to arbitration if an employee with a valid arbitration agreement sues.
Contact Erik T. Johnson or visit www.procopio.com for more information.
Erik T. Johnson