Continued from last week’s article…

California Supreme Court Rules on Inside Sales Exemption

The California Supreme Court recently issued a key decision relating to the commissioned inside salespersons exemption. The court ruled that an employer satisfies the minimum earnings requirement for this exemption only if the employer actually pays the required minimum earnings of 1.5 times the minimum wage during each pay period. An employer may not allocate wages paid in one pay period to a prior pay period to cure a shortfall. Peabody v. Time Warner Cable Inc., 2014 WL 3397770 (July 14, 2014)

Commissioned Inside Sales Test

Commissioned inside sales representatives in California are entitled to earn overtime unless they meet specific exemption requirements. Under California Wage Orders 4 and 7, a commissioned inside sales representative is exempt from overtime if:

  • The employee’s earnings exceed 1.5 times the state minimum wage; and
  • At least 50 percent of the employee’s total compensation comes from commissions.

Background

The case was brought by a Time Warner account executive, Susan Peabody, who sold cable TV advertising. She received biweekly paychecks, which included hourly wages in every pay period and commission wages when earned (generally once per month). She was not paid overtime because she was classified as an exempt commissioned inside salesperson.

Peabody worked for Time Warner for 10 months. After her employment separation, she filed a lawsuit claiming that she was improperly classified as exempt and that she regularly worked more than 45 hours per week without receiving overtime pay.

Peabody argued that in those biweekly pay periods that did not include a commission payment, she received less than 1.5 times the minimum wage and, thus, did not qualify for the commissioned inside salesperson exemption.

Time Warner did not dispute that Peabody regularly worked in excess of 40 hours per week and was not paid overtime. However, Time Warner argued that the exemption’s minimum earnings prong was met if the company factored in Peabody’s monthly commissions. The company argued that the commissions, which were paid on the final biweekly payday of each month, should be assigned to the weeks of the preceding month.

The case was brought in federal court, but the federal Ninth Circuit asked the California Supreme Court to resolve the question of “whether an employer may attribute commission wages paid in one pay period to other pay periods to satisfy the compensation requirement” because no binding legal precedent existed on this issue.

Examine Amount of Wages Paid in Each Pay Period

The California Supreme Court ruled unanimously that an employer may not assign commission wages paid in one pay period to earlier pay periods to meet the minimum earnings prong. Whether the minimum earnings prong is satisfied depends on the amount of wages actually paid in a pay period. An employer must actually pay more than 1.5 times the minimum wage for the hours worked during each pay period.

For example, if Peabody worked 45 hours per week, her earnings could exceed 1.5 times the minimum wage ($8 per hour at the time in question) only if she was paid more than $540 per week ($12 x 45 hours). But in one biweekly period in October, Peabody was paid $769.23 in hourly wages, making her weekly earnings $384.62. Time Warner argued that it should be able to assign the $2,041.33 in commission wages paid in November to the October workweeks to make up the earnings shortfall.

The court ruled that this practice was not allowed.

Court’s Reasoning

The court reasoned that its interpretation of Wage Orders 4 and 7 “narrowly construes the exemption’s language against the employer with an eye toward protecting employees” and is also “consistent with the purposes of the minimum earnings requirement.”

The court also noted that its decision was consistent with:

  • California Labor Code Section 204(a), which requires that semimonthly paychecks include the wages earned during that pay period; and
  • California Labor Code Section 225, which requires that an itemized wage statement be provided at the time wages are paid and which requires that the statement also include: “(1) gross wages earned, … (5) net wages earned [and] (6) the inclusive dates of the period for which the employee is paid.”

In addition, the court looked to the Division of Labor Standards Enforcement’s (DLSE) enforcement guidance manual which states that to meet the minimum earnings test, “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 the wages due for one period until payment of the wages due for a later period.” (DLSE, Enforcement Policies and Interpretations Manual, Section 50.6.1)

Although the DLSE guidance was not binding on the court, the state Supreme Court “adopt[ed] its interpretation having independently determined that it is correct.”

The court declined to apply federal standards, which allow employers to make the type of allocation of wages which Time Warner wanted. The court noted that, unlike state law, federal law does not require employees to be paid semimonthly.

Inside Sales Exemption Tips

The commissioned inside sales exemption has always been a narrow exemption. As noted, the court’s ruling is consistent with the DLSE’s earlier interpretation and enforcement of the exemption requirement. Many employers already comply with the requirement to pay more than 1.5 times the minimum wage for each hour worked during each pay period. This ruling now creates definitive legal precedent.

This is a complicated legal area. Consult legal counsel with any questions regarding whether your inside sales employees meet the commission exemption.

Given the current minimum wage of $9 per hour, employers will need to make sure that inside sales employees who are covered by this exemption receive, in each paycheck, more than $13.50 per hour worked during the applicable workweeks covered by those paychecks. If you pay commissions less than twice a month, you will need to make sure your base wages cover this test.

Employers also have to meet all other components of the exemption. The court did not address the second prong of the test: the requirement that more than 50 percent of the employee’s pay must come from commissions. But it is clear that if the hourly base rate is higher, it may also be harder to meet the more than 50 percent commission requirement.

Employers should consider these tips regarding the commissioned inside salesperson exemption:

  • This exemption applies only to Wage Orders 4 and 7;
  • The exemption applies only to overtime compensation, not to minimum wagemeal and rest breaks, and other Wage Order requirements;
  • Employers that believe they qualify for the state overtime exemption will still need to verify that they meet the exemption under the federal Fair Labor Standards Act, which has different requirements; and

This decision does not change the rule that commissions are earned only when all the conditions for earning that commission are met: “There is no obligation to pay unearned commission wages in any pay period.”