United States: California Court Holds That Employees Paid On Commission Are Entitled To Separate Compensation For Rest Periods

On February 28, 2017, the California Second Appellate District issued a decision in Vaquero v. Stoneledge Furniture, LLC (February 28, 2017) No. B269657, Calif. App., 2nd Dist., Div. 7, finding that an employer must separately compensate commissioned employees for rest periods. The Court began by answering the following questions:

Are employees paid on commission entitled to separate compensation for rest periods mandated by state law? If so, do employers who keep track of hours worked, including rest periods, violate this requirement by paying employees a guaranteed minimum hourly rate as an advance on commissions earned in later pay periods? We answer both questions in the affirmative...

Although not part of this case, Vaquero's holding will likely be extended to all non-selling activities, such as time spent in meetings, on certain types of training, as well as rest periods. This is a devastating decision for California employers who compensate employees based on commission-only or draw-against-commission plans.

Commission Plan/Commission Draw

Many businesses employing commissioned employees utilize a draw against commission. A draw against commission, or commission draw, is a salary plan based completely on an employee's earned commission that allows the employee to receive a regular paycheck based on their future commissions. Under such plan, an employee is advanced a set amount of money as a paycheck at the start of a pay period or sales period. At the end of the pay period or sales period, the draw is deducted from the employee's commission.

In Vaquero, Stoneledge Furniture (more commonly known as Ashley Furniture HomeStores) utilized a commission plan where Stoneledge paid a sales associate a draw against future advanced commissions if the associate failed to earn "minimum pay" of at least $12.01 per hour in commissions in any pay period. The commission plan did not provide separate compensation for any non-selling time, such as time spent in meetings, trainings, and during rest periods. Sales associates recorded their time using Stoneledge's electronic timekeeping system by clocking in and out during the start and end of their shifts and for meal periods. Sales associates did not clock out for rest periods.   

The Court of Appeal's Analysis

Stoneledge argued that its compensation plan was not in violation of California law, including Wage Order No. 7, because it paid its sales associates a guaranteed minimum for all hours worked, including rest breaks. The court disagreed and looked to the plain language of Wage Order No. 7 and its interpretations by California appellate and federal courts to conclude that commissioned employees must be separately paid for rest breaks if an employer's compensation plan does not account for minimum hourly wage for such time.

The court first considered the plain, unambiguous language of Wage Order No. 7. Wage Order No. 7 applies to all persons employed in the mercantile industry whether paid on a time, piece rate, commission, or other basis. It requires employers to count rest periods as hours worked for which there shall be no deduction from wages.

The court then turned to another California Court of Appeal decision in Bluford v. Safeway Stores, Inc. (2013) 216 Cal.App.4th 864 interpreting this language for guidance. In Bluford, the court interpreted this language to require employers to separately compensate employees for rest breaks where the employer uses an activity-based compensation system (as known as a "piece-rate" plan) that does not directly compensate for rest periods. Bluford involved Safeway truck drivers who sued Safeway for failing to provide rest periods, among other claims. Safeway used a piece-rate compensation system where it paid its drivers based on mileage rates determined by miles traveled, the time when the trips were made, and the locations where the trips began and ended. Safeway contended that its compensation system incorporated payments for rest periods into the mileage rates. The court found that it did not, and held that piece-rate compensation plans, such as Safeway's, violated California law because they do not directly account for rest periods and nonproductive time during which employees cannot earn wages. Accordingly, these compensation plans also violated the applicable wage order (similar to Wage Order No. 7) which prohibits employers from deducting wages for rest periods. Along with Bluford, the court here also relied on a string of federal court cases that have considered this issue of California law and reached a similar conclusion, to support its findings that commissioned employees are entitled to paid rest periods under Wage Order No. 7.

While neither Bluford nor the federal cases applying California law involved commissioned employees, the court here nonetheless found that the same line of reasoning applied to piece-rate compensation plans equally applied to employees paid on commission, who are not separately compensated for rest periods. When Stoneledge paid an employee only a commission, that commission did not account for rest periods. When Stoneledge compensated an employee on an hourly basis, the company took back that compensation in later pay periods. In neither situation was the employee separately compensated for rest periods, since taking back money paid to the employee effectively reduced either rest period compensation or the contractual commission rate. 

Thus, by way of Wage Order No. 7 and Bluford, the court held that a commission-based compensation plan must separately account and pay for rest periods to comply with California law. And because Stoneledge did not separately pay its commissioned employees for rest periods under its commission plan, it was in violation of California law.

Conclusion

The Vaquero decision is demoralizing for California employers and will undoubtedly result in a flood of wage and hour litigation against companies who utilize commission-only or draw-against-commission payment schemes. All employers who utilize such payment plans are advised to seek legal counsel. Your dedicated team of employment attorneys at Lewis Brisbois is standing by to assist your business in navigating through this latest legal development.

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.

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