Feds Get Technical! Technical! (Sung to Olivia Newton John’s “Let’s Get Physical” of course)

by Ervin Cohen & Jessup LLP
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Woman refereeWe already know that California’s exempt/non-exempt classification scheme is a complicated system of checks and balances that takes most employers the help of an attorney to traverse. Well, just so we don’t get overly confident that we’ve finally mastered it, the feds weighed in on the issue and have made it even more complicated and burdensome.

Specifically, the Ninth Circuit court sitting in California and reviewing the California overtime exemption for commissioned inside salespeople has just added a hoop through which California employers must jump to maintain the exempt classification.

In Peabody v. Time Warner Cable, Inc., the plaintiff used to work as a salesperson who was paid both a base hourly rate as well as an earned commission. While employed, she was paid every two weeks. She received her base pay every pay period and she received her commissions every second pay period. Sounds ok, right?

Nonetheless, following the termination of her employment, the plaintiff sued Time Warner for having failed to pay her for the hours of overtime she worked practically every week. Time Warner responded that even though she did regularly work 45 hours per week, she was not owed overtime because she was exempt as a commissioned employee. Namely, as the Wage Order exemption requires, the plaintiff’s total earnings exceeded 1.5 times the minimum wage when looked at both the base rate as well as the commissions. Also sounds, ok, right?

Not so fast. The court stated that Time Warner got it all wrong. Time Warner only paid commissions every other pay period but was counting them toward the minimum compensation needed to meet the overtime exemption. Time Warner could not do that, said the court. Rather, in order to qualify for the exemption, Time Warner had to meet the exemption in each pay period. In other words, because Time Warner’s pay periods were bi-weekly, then each bi-weekly paycheck had to amount to at least 1.5 times the minimum wage. Since they did not, Time Warner was out of luck and out of an exemption.

While this recent ruling is causing quite a buzz in the blogosphere, it really needn’t. The Ninth Circuit decision only echoes what has always been the interpretation of the exemption by the DLSE: “The minimum compensation component of the exemption must be satisfied in each workweek and paid in each pay period.” (DLSE Enforcement Policies and Interpretations Manual, June 2002, Section 50.6.1)

Are you surprised to learn this or have you always known and followed the law?

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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