In Vaquero v. Stoneledge Furniture, LLC, (No. B269657, filed 2/28/17) the California Court of Appeal for the Second Appellate District held employers must separately compensate their commission based employees for mandatory rest periods required under California law.
In Vaquero, plaintiff employees filed a putative class action against their former employer to recover unpaid rest period wages. The employer, Stoneledge, compensated plaintiff employees pursuant to a Commission Compensation Pay Agreement. Under the agreement, furniture sales employees were paid on a commission basis. If a sales associate failed to earn “minimum pay” of $12.01 per hour in commission in any pay period, the employer paid the employee a “draw” against “future advanced commissions” to ensure the employees “will always receive at least $12.01 per hour for every hour worked.” Although the employees tracked their non-selling time, such as time spent in meetings, training, and during rest periods, via an electronic timekeeping system, the commission agreement did not provide for separate compensation for this time. Plaintiffs argued this violated California Labor Code section 226.7 which requires an employer to provide rest periods and entitles employees to one additional hour of pay for each workday a rest period is not provided.
The trial court granted summary judgment in favor of the employer finding its payment system “specifically account[ed] for all hours worked” and “by tracking all the hours that its employees were present at the facility, including rest periods, Stoneledge was able to ensure the compensation it paid to its employees via commission would never fail to include payment for the time employees spent taking their mandatory rest periods.”
On appeal, the Vaquero court reversed, holding Industrial Welfare Commission Wage Order No. 7 requires employers to separately compensate covered employees for rest periods. It further held this requirement applies to employees paid on commission, and Stoneledge’s commission agreement did not separately compensate sales associates for rest periods as required under California law. Pursuant to Wage Order No. 7, all persons employed in the mercantile industry must be permitted to take rest periods and such authorized rest period time “shall be counted as hours worked for which there shall be no deduction from wages.” The Vaquero court found Stoneledge’s commission agreement did not fulfill this requirement.
In reaching its conclusion the Vaquero Court relied on Bluford v. Safeway Stores, Inc. (2013) 216 Cal.App.4th 864. In Bluford, the court interpreted the bolded language in Wage Order No. 7 to require employers to “separately compensate employees for rest periods where the employer uses an 'activity based compensation system' that does not directly compensate for rest periods.” (Id. at 872.) The Bluford court held that the defendant employer’s piece-rate compensation plan (under which employees are paid according to the number of “units turned out”) did not directly account for rest periods during which employees cannot earn wages. It found that allowing an employer to account for rest periods in this manner ran afoul of the principal set forth in Armenta v. Osmose, Inc. (2005) 135 Cal.App.4th 314 which held employers cannot comply with minimum wage obligations by averaging wages across multiple pay periods; instead “[t]he minimum wage standard applies to each hour worked by [employees] for which they were not paid.” A piece-rate compensation plan violates this principal by allowing employers to effectively “average pay to comply with the minimum wage law instead of separately compensating employees for their rest periods at the minimum or contractual hourly rate.” (Bluford, supra, 216 Cal.App.4th at p.872.)
While Bluford did not involve employees paid on commission, the Vaquero court concluded Wage Order No. 7 applies equally to commissioned employees, employees paid by piece-rate, or any other compensation system that does not separately account for rest breaks and other nonproductive time. The court found the commission agreement used by Stoneledge was analytically indistinguishable from a piece-rate system in that neither allows employees to earn wages during rest periods, as the purpose of a rest period is to rest, not to work. It explained “[l]ike the compensation plans courts have found unlawful for failing to pay for nonproductive time, Stoneledge’s commission agreement did not compensate for rest periods taken by sales associates who earned a commission instead of the guaranteed minimum.” “For sales associates whose commissions did not exceed the minimum rate in a given week, the company clawed back (by deducting from future paychecks) wages advanced to compensate employees for hours worked, including rest periods. The advances or drafts against future commissions were not compensation for rest periods because they were not compensation at all. At best they were interest-free loans.” The court held “taking back money paid to the employee effectively reduces either the rest period compensation or the contractual commission rate, both of which violate California law.”
While the Vaquero court did not cast doubt on the legality of commission-based compensation, its decision is a reminder employers must pay careful attention to comply with all applicable wage and hour laws when crafting commission agreements.
