Commission Agreements and other Employment Contracts

In California, it is not necessary to have any written “employment contract” in order to get paid for your work. If you have an employment contract, it usually governs things like confidentiality, trade secrets, cause for termination, commissions, bonus payments, salary or wages, arbitration, minimum qualifications for employment, and so on.

Some employment terms are illegal in California. For instance, employees cannot agree to work for less than the applicable minimum or overtime wage.  Employers also cannot enforce “non-compete” clauses against former employees, due to California’s blanket ban on non-compete clauses. On the other hand, some employment terms have to be in writing, such as commission plans (California Labor Code section 2751) or agreements for “comp-time” (time-off in lieu of overtime pay). Also, some California laws are guaranteed regardless of whether you have an employment contract, such as your rights under the FEHA or the ADA, your rights to be free from discrimination or retaliation, and your rights to a healthy and safe working environment under various health and safety regulations. In limited circumstances an otherwise valid contract may be unenforceable because it is “unconsionable.” In other words, the contract is so unfair, either in its terms or in how it was offered, that a court will refuse to enforce it, even if everyone signed it.

A breach of contract claim requires (a) a valid contract; (b) evidence the Plaintiff performed their end of the contract, or was otherwise excused from performing; (c) evidence that defendant did not perform their end of the contract; and (d) damage to plaintiff.

Contracts can be written, oral or implied. In the employment context, although it is rare that employees nowadays have extensive written employment contracts, employment contracts can be created in a number of less obvious ways:

• Written commission or bonus agreements;

• If you are promised certain terms of employment either via e-mail or orally, e.g. that you will be employed for a certain amount of time;

• Verbal or written guarantees that you will not be fired except for a specific reason;

• Offer letters spelling out terms of future employment.

The most common employment contract cases involve disputes over promised compensation. This includes commissions, bonuses, equity stakes, stock option agreements, “restricted stock” (“RSU”) agreements, and many others. Sometimes employer agreements on these issues are ambiguous, or perhaps not even written down at all, and then when employees are terminated there is often a dispute as to what additional compensation, if any, is owed to the employee. Commission agreements in particular must be written and should carefully specify exactly when commissions are actually earned. Vague commissions agreements are often construed against the drafter (i.e., the employer.)  Once earned, employees are entitled to commissions even if they are fired before the commissions are paid.

Less common contract claims include claims for breach of a employment contract for a specified term, or for terminating an employee for reasons not constituting “good cause.” Contracts limiting an employer to terminating employees “for cause” are rare for the very simple reason that employers don’t have to offer them. In California, the default rule is that every employee is “at-will,” meaning they can be fired for any reason, at any time. There is rarely any reason for an employer to alter the default “at-will” relationship since it affords employers wide latitude in personnel decisions. However, in rare cases where employees are provided the protection of “for cause” termination provisions, employers can only terminate these employees for limited, specific reasons. Furthermore, employers may be liable for breach of contract if they fail to give notice to the employee of any perceived deficiencies, along with a reasonable opportunity to correct any issues.