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.
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