California Supreme Court Limits Commissioned Employee Exemption

On July 14 the California Supreme Court ruled that commissions paid in one pay period cannot be attributed to earlier pay periods in order to satisfy the requirements of California’s commissioned employee overtime exemption. The case is Peabody v. Time Warner Cable, Inc.

The overtime exemption for commissioned employees (sometimes referred to as the “commissioned salesperson exemption” or “inside sales exemption”) is found in Industrial Welfare Commission Wage Orders 4 and 7, which exempt from overtime requirements employees whose earnings exceed one and one half times the state minimum wage if more than half the employee’s compensation consists of commissions.

Julie Peabody worked for Time Warner Cable selling advertising. Time Warner paid Peabody her hourly wages every two weeks, but paid her commissions only once a month.

Peabody brought a class action against Time Warner for unpaid overtime. Time Warner did not dispute Peabody’s claim to have worked overtime, but contended she fell within the commissioned employee exemption. The company acknowledged that most of Peabody’s paychecks included only hourly wages that were less than one and one half times the minimum wage, but argued that commissions paid monthly should be averaged out over all the weeks of the month, including weeks in earlier biweekly pay periods, in order to satisfy the minimum earnings requirement. Peabody contended the requirement can only be satisfied by applying commissions to the pay period in which they are paid.

The district court agreed with Time Warner and granted summary judgment. Peabody appealed to the Ninth Circuit Court of Appeals, which could find no clear controlling precedent to resolve the issue. The Ninth Circuit certified the question to the California Supreme Court.

The state’s high court saw things Peabody’s way. While acknowledging that an employer is permitted to pay commissions monthly or even less frequently, the court concluded that for purposes of the commissioned employee exemption, the minimum earnings requirement is satisfied only in those pay periods in which it actually pays the required minimum earnings. In other words, an employer may not satisfy the requirement by reassigning wages paid in one pay period to a different pay period. The court reasoned that to rule otherwise would be inconsistent with Labor Code Section 204, which requires wages to be paid at least twice per month. The court rejected Time Warner’s argument that the monthly averaging method should be endorsed because federal law permits it, explaining that, in light of the “substantial differences” between federal and California wage and hour laws, “reliance on federal authorities to construe state regulations would be misplaced.”

Employers should review their pay practices to ensure that all employees classified under California’s commissioned employee exemption are paid at least one and one half times the state minimum wage during each pay period. Employers should also ensure that these employees satisfy the other requirement of the exemption, i.e., that commissions account for more than half of their total compensation.

Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

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