Last week the California Court of Appeal issued a decision holding that employers must separately compensate commissioned (“inside sales”) employees for legally required rest breaks.
Under California law most employees are entitled to a paid 10-minute rest break for every work period of four hours, or major fraction thereof. California law also provides an overtime exemption for commissioned salespeople, but this “inside sales” exemption does not exempt those employees from minimum wage or meal and rest break requirements. (So-called “outside” salespeople are not subject to minimum wage, overtime, or meal/rest break requirements.)
Stoneledge Furniture compensated its retail sales associates according to a standard commission agreement. The agreement provided for sales associates to be compensated on a commission-only basis, but also guaranteed the associates a minimum income of $12.01 per hour. The minimum income was paid to sales associates as a “draw” against future commissions. If an associate earned commissions that met or exceeded the draw, the associate would be paid the commissions actually earned. But if an associate’s earned commissions were less than the draw, the associate would receive the minimum draw. The agreement did not provide separate compensation for any non-selling time, such as time spent for meetings, training, or rest breaks.
Two sales associates filed a class action against Stoneledge alleging the company failed to provide paid rest breaks. The trial court certified a class but later granted summary judgment to Stoneledge, finding that by guaranteeing sales associates a minimum income of $12.01 per hour, Stoneledge ensured they would be paid for all hours worked, including rest breaks.
The Court of Appeal reversed, holding that Stoneledge violated California law by not separately compensating sales associates for rest breaks. The court relied on the applicable wage order, which provides, “authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages.” The court reasoned that since the minimum pay guarantee was a draw against commissions, it was simply an advance subject to clawback, or deduction, from future commissions. As a result, when a sales associate earned commissions that exceeded the draw, the only pay the associate received consisted of commissions, which did not account for rest breaks. The court held that to comply with California law, commission-based compensation plans must provide for separate pay for legally required rest breaks. In reaching its conclusion, the court relied on previous cases holding that piece-rate employees must be separately compensated for rest breaks, a requirement the state legislature later codified at California Labor Code section 226.2, which took effect in 2016.
Although this decision focused on rest breaks, its reasoning applies equally to other compensable yet “non-productive” time that is not accounted for and compensated under commission or piece-rate compensation plans. Employers with California-based commissioned (inside) salespeople, or employees paid on a piece-rate basis, should review their compensation plans to ensure those employees are separately paid at least the minimum wage for rest breaks and other non-productive yet compensable time, and that this pay does not operate as a “draw” subject to deduction. In other words, pay for all non-productive compensable time must be guaranteed and independent from compensation tied to sales commissions or piece-rate production.