On July 14, 2014, the California Supreme Court clarified that an employer may not attribute commissions paid in one pay period to a prior pay period in order to satisfy California's minimum-wage requirement or meet the inside-salesperson exemption. The Court's decision will require employers throughout California to review their commission pay practices. Peabody v. Time Warner Cable, Inc.
Facts Of The Case
Under an account-executive compensation plan, Time Warner paid
Susan Peabody hourly wages on a semimonthly basis and commissions
on a monthly basis. She regularly worked more than 40 hours per
week selling advertising and was never paid overtime. Time Warner
argued that Peabody fell within the commissioned-employee exemption
from overtime, which applies to inside salespersons who earn more
than one and one-half times the minimum wage for all hours worked
in a pay period and who derive at least half of their compensation
from commissions.
In her class action suit, Peabody argued (and Time Warner
acknowledged) that her semimonthly paychecks did not meet the
minimum-compensation requirements under the exemption and on
certain occasions resulted in Peabody earning less than the minimum
wage. Time Warner argued that her 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.
Finding no controlling authority, the Ninth Circuit asked the
California Supreme Court to consider whether Peabody's
commissions could be allocated to a prior pay period.
The Court's Ruling
In a unanimous decision, the California Supreme Court held that
in order for the inside-sales exemption to apply, the minimum
earnings component "must be satisfied in each workweek and
paid in each pay period." The court found that allocating
commissions as advocated by Time Warner would run afoul of
California's requirement that employees be paid all earned
wages at least semimonthly.
In addition, the Court noted that an employer's ability to
establish, by written agreement, conditions necessary for a
commission to be "earned" (which may still occur on a
monthly, quarterly, or less-frequent basis) does not override the
requirement for at least a semimonthly pay period established by
California Labor Code section 204(a). Under the same
logic, the Court held an employer may not reassign commissions paid
in one pay period to cover a minimum wage shortfall in a previous
pay period.
The Impact On Employers
Clearly this decision will affect many industries, the most
obvious of which may be the retail industry. Given that employers
bear the burden of establishing that an exemption from overtime
applies, all employers should review their commission-pay plans to
ensure that they comply with this decision.
In pay periods when commissions are not paid, take care to 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 expose your
company to class-action litigation involving claims of
misclassification and liability for unpaid wages and
penalties.
The fact that an employee is highly compensated is not
determinative of whether he or she is exempt. Peabody earned
roughly $75,000 in ten months of working for Time Warner. Still,
based on Time Warner's commission-pay practices, she may have
been entitled to overtime during the weeks in which no commissions
were paid.
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