Think Your Commission-Only Plan Is Good?

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Constangy, Brooks, Smith & Prophete, LLP

Think again.

Two of the more complicated areas of California wage-and-hour law involve commission plans and overtime exemptions. Commission plans are complex animals – long gone are the days where Joey gets 5 cents for each widget he sells and we call it a day. Overtime exemptions are likewise fraught with landmines, and many a California employer becomes ensnared in the overlapping rules of the Wage Orders, court decisions, and guidance from the Division of Labor Standards Enforcement and Department of Labor.

For those of you who say “bring it on,” Christmas came early with the Fourth Appellate District’s decision in Semprini v. Wedbush Securities, Inc., in which the court analyzed whether an employee who was paid 100 percent on commission was properly classified as "exempt" under the administrative exemption established in Industrial Welfare Commission Wage Order 4.

The Semprini court determined that a compensation plan based solely on commissions, with recoverable advances on future commissions, did not qualify as a “salary” for purposes of the exemption.

Background

Wedbush Securities, Inc., is a securities broker-dealer firm. It paid its financial advisors 100 percent on commission and classified them as exempt under the administrative exemption. Wedbush used a computer program to track the trades the financial advisors made each month, then calculated the compensation owed based on what commission tier the employee met that month. The higher the employee’s total monthly gross product sales, the higher the percentage used to calculate the employee’s monthly commission payment. So far, so good.

If the amount of commissions a financial advisor earned in a given month was not at least double the California minimum wage, Wedbush would pay the financial advisor the commission due plus a “draw”-- or advance on future commissions -- in an amount equal to the difference between the commission and double the minimum wage. The financial advisors would have to repay the draw from future commissions. If the financial advisor had not fully repaid the advances by the time of termination, the remaining balance would be owed at that time.

"Salary basis"?

The case hinged on whether the financial advisors were paid on a “salary basis,” which is required for the administrative exemption. More specifically, the California regulations state that to qualify for any of the “white-collar” exemptions, the employee must receive a monthly salary of no less than two times the state minimum wage for full-time employment (which is defined as 40 hours per week). Looking to federal regulations for guidance, the court noted that the hallmark of being paid on a salary basis was to receive a fixed amount of compensation for all or part of the work performed, which is not subject to variations based on the quality or amount of work. Thus, because commissions naturally vary each month based on sales, they do not fit the bill.

Now, you may ask, what about the monthly “advance” or a draw in the amount of two times the minimum wage? Surely that would save the employer?

As the court noted, in a 2006 opinion letter, FLSA2006-43, the U.S. Department of Labor said that certain financial advisors met the administrative exemption under federal law. There, the employees received a monthly salary, which was then reconciled against the commissions earned in the following month(s). However, the employees there were not required to repay any of guaranteed minimum payment/draw amount if they were in deficit at the time of termination.

It seems that the fact that tipped the scale for the Semprini court was that Wedbush’s scheme would require its terminated financial advisors to repay any unreconciled advances. Moreover, the Semprini court cast doubt on an employer’s ability to use an advance or draw at all to meet the salary basis test for the administrative exemption in California.

What does this tell us?

Most importantly, California employers who wish to rely on a white-collar exemption must review their commission plans very closely to ensure that the employees receive a minimum guaranteed salary each month. In California, it may be safer simply to pay a salary plus commission to avoid any argument that the advance or draw on commission is not a guaranteed amount that meets the salary basis test.

Bear in mind that the Semprini decision does not address the outside sales exemption, or even the “inside sales” exemption, under Wage Order 7. The decision is limited to the salary basis test under the administrative exemption, which is one of the white-collar exemptions, under Wage Order 4.

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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