United States: When Is A Commissioned Salesperson Exempt From Overtime In California?

California Supreme Court Holds that Commissions Cannot Be Allocated to Pay Periods in Which They Are Earned

California and federal law establish different requirements for the so-called "commissioned employee" overtime exemption. This exemption allows many California employers to avoid paying overtime compensation to some commissioned employees. On July 14, the California Supreme Court issued its decision in Peabody v. Time Warner Cable, Inc., Case No. S204804 (July 14, 2014), which begins to define the contours of the California exemption. As will be discussed in the paragraphs that follow, Peabody will require employers to monitor the earnings of such employees every pay period. An employee could be exempt under the "commissioned employee" exception in one pay period and non-exempt in the next pay period. For pay periods in which these employees are not exempt, the employees must be paid overtime in accordance with California law. Further, employers must maintain time records on commissioned employees as those employees are exempt only from overtime requirements and not from meal/rest period or other requirements for non-exempt employees.

The Peabody decision applies only to "inside" sales personnel; it does not address or affect the "outside sales" exemption for employees who work more than 50 percent of their time away from the employer's premises and engage in selling and closely related sales activities.

Under section 7(i) of the Fair Labor Standards Act, commissioned employees working for retail or service establishments need not be paid overtime if: (i) the employee's regular rate of pay exceeds one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked; and (ii) more than half the employee's total earnings in a representative period must consist of commissions. See 29 C.F.R. § 779.412. To satisfy the first of these tests, "[t]he employee's 'regular rate' of pay must be computed ... on the basis of his hours of work in that particular workweek and the employee's compensation attributable to such hours." Id. § 7779.419(b). Whether compensation representing commissions constitutes most of an employee's pay under the second test "must be determined by testing the employee's compensation for a 'representative period' of not less than 1 month," as long as the chosen period "typifies the total characteristics of an employee's earning pattern in his current employment situation, with respect to the fluctuations of the proportion of his commission earnings to his total compensation." Id. § 779.417(a).

It likely comes as no surprise to learn that California law is different. Rather than limit the commissioned employee exemption to the retail and service sectors, California's Wage Orders create a commissioned employee exemption for workers in the mercantile (i.e., retail) industry governed by Wage Order No. 7, as well as to workers who work in "professional, technical, clerical, mechanical and similar occupations" governed by Wage Order No. 4. However, many employers who utilize commissioned sales for marketing personnel are not subject to either Wage Order No. 4 or 7. For example restaurants, hotels, resorts, and health clubs all utilize sales or marketing employees who are frequently paid on a commissioned basis, but none of those employers is subject to either Wage Order No. 4 or 7.

Like federal law, the Wage Orders generally provide that commissioned employees need not be paid overtime if: (i) their "earnings exceed one and one-half times the minimum wage" and (ii) "more than half of that employee's compensation represents commissions" Cal. Code Regs., tit. 8 §§ 11040(3)(D) & 11070(3)(D) (Wage Order Nos. 4 and 7, Section 3D). However, the Wage Orders do not create a "representative period" test, and they provide little if any guidance as to how to determine whether and under what circumstances the employee's "earnings exceed one and one-half times the minimum wage" under state law. 

The California Supreme Court provided some guidance with respect to these issues in Peabody v. Time Warner Cable, Inc. The California Supreme Court held that, to determine if the employee's "earnings exceed one and one-half times the minimum wage," the employer must actually pay sufficient wages (base pay and/or commissions) each pay period, in order for the exemption to apply. This will render the exemption much less useful where an employer accrues commissions over a period of one month or longer but pays the commissions only at the end of the accrual period.

In Peabody, Time Warner employed Susan Peabody as an account executive who sold advertising on the company's cable television channels. The company paid Peabody straight hourly wages on a biweekly basis but calculated and paid Peabody's commissions on a monthly basis. The company acknowledged that most of Peabody's paychecks included only hourly wages at a rate that was less than one and one-half times the minimum wage. However, the company claimed that Peabody nonetheless qualified for the commissioned employee exemption under Wage Order 4 because her commission earnings "should be reassigned from the biweekly pay periods in which they were paid to earlier pay periods" in which they were earned. 

The California Supreme Court evaluated Time Warner's arguments pursuant to the traditional rules that California's overtime requirements "are to be construed broadly in favor of protecting employees," while overtime exemptions are to be "narrowly construed against employers. The court then held that an employer may not attribute commission wages paid in one pay period to other pay periods in order to satisfy commissioned employee overtime exemption, for three related reasons. 

First, the California Supreme Court explained that California Labor Code section 204(a) generally provides that wages "are due and payable twice during each calendar month," and that this requirement applied to commission wages. The court recognized that employers do not have an obligation to pay unearned commission wages in any particular pay period and that "commissions are owed only when they have been earned, even if it is on a monthly, quarterly, or less frequent basis." However, the court emphasized that commissions are payable in the semimonthly pay period in which they are earned.

Second, the California Supreme Court rejected the notion that commissions paid in one pay period can be attributed to another pay period. The court held that, "[w]hether the minimum earnings prong is satisfied depends on the amount of wages actually paid in a pay period," and that employers "may not attribute wages paid in one pay period to a prior pay period to cure a shortfall." The court rationalized its holding in part by explaining that "[m]aking employers actually pay the required minimum amount of wages in each pay period mitigates the burden imposed by exempting employees from receiving overtime. This purpose would be defeated if an employer could simply pay the minimum wage for all work performed, including excess labor, and then reassign commission wages paid weeks or months later in order to satisfy the exemption's minimum earnings prong." 

Third, the California Supreme Court rejected Time Warner's suggestion that the commissioned employee overtime exemption created by California's Wage Orders should be interpreted consistently with the commissioned overtime exemption recognized by section 7(i) of the Fair Labor Standards Act ("FLSA"), finding that the two laws were "substantially different" in several respects.

The California Supreme Court then summarized its holding by adopting the following three somewhat overlapping tests adopted by the Division of Labor Standards Enforcement to determine whether an employee can qualify for California's commissioned employee overtime exemption:

  1. The employee's earnings must exceed 1.5 times the minimum wage for each hour worked during the pay period.
  2. The payment of the earnings of more than 1.5 times the minimum wage must be made in each pay period. Therefore, it is not permissible to defer any part of commissions due for one period until a later period so that the later period qualifies for exemption.
  3. Compliance with the requirements of the exemption is determined on a workweek basis. The minimum compensation component of the exemption must be satisfied in each workweek and paid in each pay period.

Peabody

's holding is consistent with the enforcement policies of California's Division of Labor Standards Enforcement. Nonetheless, the California Supreme Court's decision puts into question the payroll practices of many retail and similar employers, who have long attributed commissions over a period of greater than a single pay period. Hence, in order to comply with Peabody, California employers would be well advised to consider at least the following issues:

  • Employers must consider whether commissioned employees qualify for exemption under both federal and state law. As the Peabody court noted, the commissioned employee overtime exemption recognized under the FLSA differs from the similar exemption recognized under California law. Commissioned employees must satisfy the tests laws before they would be entirely exempt from overtime pay. The federal exemption is available only to employees and employers in true retail settings.
  • Employees whose commission earnings are uneven or fluctuate widely could be exempt in one pay period and not exempt in the next. Therefore, the employer will have to determine if each employee is exempt on a pay-period-by-pay-period basis, and they will have to pay overtime under the California overtime rules for pay periods in which the employee does satisfy the elements of exemption. This is a particularly important consideration, given that the state minimum wage has recently increased to $9.00 per hour and is scheduled to increase to $10.00 effective January 1, 2016.
  • Because commissioned employees might be non-exempt in some (or most) pay periods, employers must keep time records for these individuals as if they were non-exempt employees. Additionally, employers must provide, and maintain records regarding provision of, meal and rest periods for these employees at least in those pay periods in which the exemption is not satisfied. It may be difficult to comply with this rule as a practical matter given that the amount of commission wages may not be accurately calculated in advance.
  • Faced with the burden of determining whether each of its potentially numerous sales employees qualify for exemption on a pay-period-by-pay-period basis, some employers might opt for a simpler system. This could include paying employees a lower commission percentage or element and then making up the difference with overtime premiums for hours for which such premiums are required.
  • The California Supreme Court's opinion does not address the second prong of the exemption: that more than one-half of the employee's compensation in each pay period be in the form of commissions. This requirement has, in some industries, rendered the exemption less useful. The employee's "draw" or guaranteed hourly rate must be low enough so that, in all pay periods, commissions represent more than one-half of the total earnings (which must in turn amount to more than one and one-half times the minimum wage). Therefore, the commissioned employee exemption is most helpful where the employee is substantially dependent on commission earnings. Some employers believe that higher "draws" or guarantees are effective incentives to obtain better or more loyal employees. Unfortunately, while that observation may be true, it makes the commissioned employee exemption more difficult to achieve.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.