Seeking Credit for Deferred Commissions? You Might Get Declined

by Orrick - Global Employment Law Group
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Last week, the California Supreme Court issued its decision in Peabody v. Time Warner Cable, Inc., deciding that employers may not apply commission payments to earlier pay periods for the purposes of establishing that an employee meets the minimum wage component under the commissioned employee exemption.

The plaintiff in Peabody had worked for the defendant cable operator selling advertising on the company’s channels for 45-48 hours a week. In turn, she received $769.23 every two weeks and more substantial commissions every other pay period. Under a presumed 40-hour workweek, the flat biweekly sum provided the plaintiff an hourly wage of $9.61, a rate that more than doubled across all hours worked after incorporating her commissions. According to the plaintiff’s class complaint, however, the defendant’s payment system failed to compensate her for overtime, amongst other things.

The defendant shot back, arguing that the plaintiff was a commissioned employee exempt from the overtime provisions of Labor Code § 510. Under IWC Wage Order 4-2001, Section 3(D), the exemption applies to “any employee whose earnings exceed one and one-half times the minimum wage if more than half of that employee’s compensation represents commissions.” Leaving aside the second prong of the test, the court focused on whether the defendant’s wage disbursements satisfied the exemption’s minimum earnings requirement. There was no dispute that the hourly rate reported in a majority of the plaintiff’s paychecks fell below the minimum earnings of $12.00 per hour (1.5 times the minimum wage), but the defendant contended that commission wages should be attributed to the pay periods in which they were earned, rather than to the pay periods in which they were paid for the purpose of determining whether the minimum earnings requirement was met.

Unfortunately for the defendant, the California Supreme Court disagreed. Although the court recognized that federal regulations allow employers to defer earned commissions so long as employees are paid the minimum wage in each pay period, it concluded that the employer’s payment scheme here did not comport with the California Labor Code. In short, the court held that the employer could not attribute wages paid in one pay period to other pay periods in order to satisfy the minimum earnings requirement of the commissioned employee exemption.

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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