California Supreme Court Clarifies Commissioned Employee Exemption

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Peabody v Time Warner Cable, Inc. (July 14, 2014, No. S204804) 2014 Cal Lexis 4755, came to the California Supreme Court from the Ninth Circuit, through a certification procedure that is used when a question can determine the outcome of the case, but there is no controlling state law precedent to answer it.

The plaintiff in the case, Susan Peabody, was a Time Warner account executive from July 2008 to May 2009. Her duties included selling advertising on the company's cable television channels. Time Warner compensated Peabody through an annual base salary of $20,000, paid proportionately through bi-weekly pay periods, and commissions, paid once a month based on revenues it had collected from her advertising sales that month. The company did not pay the plaintiff overtime wages because it had classified her as exempt under California's "commission sales employee" exemption.

After Peabody left Time Warner, she brought a class action lawsuit in state court (which was removed to federal court), alleging that Time Warner had misclassified her, had not paid her the overtime she was owed, and committed other wage and hour violations.

California law entitles most employees to time-and-a-half pay for working more than 40 hours per week, but exempts sales employees who earn more than half their pay in commissions. But that exemption applies only if the employee is paid at least 1.5 times California's minimum wage, which at the time of this case was $8 per hour.

Time Warner did not dispute that Peabody regularly worked 45 hours per week and was paid no overtime. It also acknowledged that Peabody did not earn at least $12 per hour in each pay period. But it argued that her commissions could be reassigned from the pay periods in which they were paid to the period over which they were earned (e.g., a payment at the end of June could be spread out for exemption purposes over the entire month of June). Reallocating the commissions in this way increased Peabody's hourly pay to more than 1.5 times the minimum wage.

The Ninth Circuit asked the California Supreme Court to answer the following questions: Could Peabody's commissions be averaged over the month in which they were earned, or did they apply only to the pay periods in which they were paid?

The Supreme Court's unanimous answer? No, an employer may not attribute commission wages paid in one pay period to other pay periods in order to satisfy the minimum earnings requirement of the exemption. Wages must be determined separately for each pay period. It would be inconsistent with Lab C §204 (timing of wage payments) and §226 (itemized wage statements) if the employer could attribute commissions over a month to meet the exemption.

The Court expressed no opinion whether the second part of the exemption requirement (that the majority of a sales employee's pay come from commissions) is also subject to the pay-period-by-pay-period rule. Apparently, Peabody did not raise that issue, so that question remains unanswered.

This case does not mean that monthly or quarterly commission systems must be abandoned. It merely underscores the importance of compensating sales employees sufficiently to bring them within the exemption, regardless of how often commissions are earned.

  • In addition to Peabody, the Court has recently issued a number of other significant decisions in the employment law area:
    • Duran v U.S. Bank National Ass'n (2014) 59 C4th 1 (involving issues in the litigation of employee misclassification class actions);
    • Iskanian v CLS Transp. Los Angeles (2014) 59 C4th 348 (class action waivers in employment arbitration agreements and the waiver of representative claims under the Private Attorneys General Act);
    • Salas v Sierra Chemical Co. (2014) 59 C4th 407 (protections for undocumented workers; after-acquired evidence and unclean hands defenses); and
    • Ayala v Antelope Valley Newspapers (2014) 59 C4th 522 (employee vs. independent contractor status at the class certification stage).

For further information, see California Wage & Hour Law and Litigation, chaps 6-7 (Cal CEB 2010).

© The Regents of the University of California, 2013. Unauthorized use and/or duplication of this material without express and written permission is strictly prohibited.

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Topics:  Class Action, Employer Liability Issues, Exempt-Employees, Misclassification, Sales Commissions, Time Warner, Wage and Hour

Published In: Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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