The Commissioned Salesperson Exemption Just Got More Difficult to Establish

by Hirschfeld Kraemer LLP
Contact

Many California employers rely on California's commissioned salesperson exemption from overtime for their inside sales employees.  That exemption, however, is becoming increasingly difficult to establish.  A recent decision of the California Supreme Court, Peabody v. Time Warner Cable, Inc., erects additional hurdles to its availability.

Summary:  Recall that to be exempt from overtime under the commissioned salesperson exemption in California, (1) the employee must have earnings that exceed 1.5 times the minimum wage and (2) more than half of the employee's compensation must be in the form of commissions.   The Peabody decision holds that the 1.5 times minimum wage requirement must be met in each paycheck.  Therefore, if one of the two paychecks for the month consists solely of hourly wages or an advance on commissions, that amount must equal at least $13.50 per hour (based on the current $9/hour minimum wage) for each hour the employee worked in the pay period. 

The Peabody v. Time Warner Decision

Susan Peabody worked for Time Warner as a commissioned salesperson, selling advertising on cable television channels.  Peabody received $769.23 every other week in hourly wages ($9.61 per hour for a 40 hour workweek).  Approximately once per month, she was paid commissions earned during the preceding month.  Time Warner did not pay Peabody overtime, determining that she was exempt under California's commissioned salesperson exemption. 

After her Time Warner employment ended, Peabody brought a wage and hour complaint in state court.  Time Warner Cable removed her lawsuit to federal court, where it obtained dismissal of the entire action through summary judgment.  Peabody appealed, and the Ninth Circuit Court of Appeals requested that the California Supreme Court rule on the legal question presented by Peabody's claim:  whether she met the exemption during pay periods where her paychecks were too low to meet the requirement of 1.5 times the minimum wage.

The California Supreme Court started with the statutory requirement in Labor Code section 204 that "'[a]ll wages . . . earned by any person in any employment are due and payable twice during each calendar month . . . .'"  This requirement applies to commissioned salespersons.  The Court explained that while the Division of Labor Standards Enforcement (DLSE) may allow employers to calculate commissions on a monthly basis or at whatever point they are earned, that fact had no bearing on Labor Code section 204's twice per month payment requirement.

Time Warner argued that Peabody met the requirement of 1.5 times the minimum wage, because the monthly commissions she was paid in one pay period were properly attributed to all pay periods during the month.  The Court rejected that argument.  It held that to decide whether a commissioned salesperson makes over 1.5 times the minimum wage for each hour worked, only the wages paid during a given pay period can be considered.  "An employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall."  The Court announced that its "interpretation narrowly construes the exemption's language against the employer with an eye toward protecting employees."

What Employers Need To Do Now

Most employers pay commissions only once per month, or even quarterly.  That practice is now questionable under the commissioned salesperson exemption.   Now, each paycheck must be in an amount equal to or greater than 1.5 times the minimum wage, i.e., at least $13.50 per hour at the $9.00 minimum wage.  To the extent the minimum payment exceeds any base paid to the employee, it can be characterized as an advance against future commissions.

The Peabody court did not address the other requirement for the exemption, that commission comprise at least half of all compensation.  The DLSE's enforcement position on this requirement is two-fold:  (i) commissions need not be paid in each paycheck but rather can be paid less frequently as they are earned; but (ii) the 50% commission requirement must be satisfied in each workweek.  There are obviously difficult practicalities with determining to which week a given commission can be attributed.  Key to compliance with the DLSE's view would be providing payroll detail to commissioned salespersons indicating the date of the transaction to which the commission or commission advance is attributable.  It is also critical to audit exempt status each month, and to pay overtime in any workweek in which the commission threshold is not met.

In addition, it is unclear whether a court examining the issue will ultimately follow the DLSE's position on measuring the 50% commission threshold and instead insist that it be met in each paycheck.  Employers may therefore want to consider a commission payment system in which commissions or commission advances are paid each pay period to ensure that each paycheck is comprised half or more of commissions or advances against future commissions. 

Finally, employers should also take this opportunity to review the other requirements of the commissioned salesperson exemption and to ensure their commission plans fully comply with this technically complicated overtime exemption.   These requirements are summarized below.

Other Issues With The Commissioned Salesperson Exemption

The California commissioned salesperson exemption is a narrow exemption and becoming narrower all the time.   There is also a federal exemption under the FLSA that is narrower in one respect than the California exemption.  Below, we have detailed these and other issues with the commissioned salesperson exemption:

  • The California exemption is only available to employers under two wage orders:  Wage Order 7, covering the "Mercantile Industry," i.e., wholesale, retail and rental businesses; and Wage Order 4, which applies only when an "industry" wage order does not cover the employer, and only then to its "Professional, Technical and Clerical Occupations."  Thus, for example, hotels and restaurants, who are covered by Wage Order 5 ("Public Housekeeping Industry"), cannot use the commissioned salesperson exemption.

  • California strictly limits what it considers to be a "commission" applicable to the compensation requirements of the exemption.  In contrast to the FLSA, a "commission" can only be earned by employees actually engaged in sales.  Under the FLSA, any incentive payment that is a percentage of the invoice will typically qualify as a commission. 

  • On the other hand, the FLSA's commissioned employee exemption under section 7(i) is limited to employees working in retail establishments.   Some employers such as wholesalers and financial institutions, are not considered "retail" in nature and will be unable to establish the exemption under federal law.

  • The decision in Gonzalez v. Downtown LA Motors, 215 Cal.App.4th 36 (2013), indicates that employees compensated on an incentive basis (piece rate or commission) must be paid separately for any hours in which they are prevented from earning incentive pay, at the minimum wage or higher.  Therefore, employers will want to ensure that they separately compensate commissioned salespersons for time spent in meetings, rest breaks, and other tasks not directly related to sales activities.

  • To ensure that the 1.5 times minimum wage requirement is met, employers must keep accurate time records for all employees they wish to exempt from overtime under the commissioned salesperson exemption.

  • The commissioned salesperson exemption is a limited one.  It does not exempt employees from the right to meal and rest periods, or to meal and rest period premiums when those rights are denied.

  • All commission plans must now be in a written document that clearly spells out when commissions are earned, characterizes commission payments prior to earning as advances, and avoids any forfeiture of earned commissions.  

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.

© Hirschfeld Kraemer LLP | Attorney Advertising

Written by:

Hirschfeld Kraemer LLP
Contact
more
less

Hirschfeld Kraemer LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.