The California Supreme Court has narrowed application of the “commission exemption” from overtime. The case is Peabody v. Time Warner Cable, Inc.
The Details:
Under California law, the commissioned employee exemption applies to certain sales employees covered by IWC Wage Order 4 or 7. It provides that the overtime provisions in the Wage Order “shall not apply to any employee whose earnings exceed one and one-half (1 1/2) times the minimum wage if more than half of that employee’s compensation represents commissions.”
The issue addressed in the Supreme Court case is that the provision does not identify the time period for which the employee’s pay must exceed one and one-half time the minimum wage, so many employers use whatever period was used for calculating commissions.
Time Warner argued that commissions should be attributed to the pay period in which they were earned for purposes of meeting the exemption’s minimum-salary requirement and satisfying the minimum-wage obligation.
The California Supreme Court ruled that an employer may not attribute commission wages paid in one pay period to other pay periods to satisfy California’s compensation requirements of earning at least 1.5 times the state minimum each pay period. The Court stated:
In conclusion, we hold that an employer satisfies the minimum earnings prong of the commissioned employee exemption only in those pay periods in which it actually pays the required minimum earnings. An employer may not satisfy the prong by reassigning wages from a different pay period.
Practical Impact
Clients applying the commissioned employee exemption should review their commission-pay plans to ensure that they comply with this decision and should consult with experienced legal counsel to help ensure compliance. Contact your Human Resource Business Partner for a referral to a national employment law firm if needed.
More specifically, in pay periods for which commissions are not paid, clients should ensure that commissioned-sales employees earn more than one and one-half times the minimum wage (currently, $13.51 per hour) for all hours worked during that pay period. Failure to do so could result in an otherwise exempt employee becoming converted to non-exempt status under the law.
Clients are also reminded that this decision affects only employers under Wage Orders 4 and 7 since the commission exemption is stated only in these two Wage Orders. In addition, clients should also verify that exempt commissioned employees meet an overtime exemption under federal law. Available exemptions could include but would not be limited to the outside sales exemption or the retail sales or service exemption.
As always, please contact your Human Resource Business Partner if you have any questions.
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This content provides practical information concerning the subject matter covered and is provided with the understanding that ADP is not rendering legal advice.
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