California's Commissioned Employee Exemption

In response to an inquiry from the Ninth Circuit, the California Supreme Court has explained how earnings should be allocated when determining whether a commissioned employee's wages exceed one and a half times the minimum wage. That is one of the elements of California's commissioned employee exemption from overtime requirements. See Wage Order No. 4, section 3(D).

Susan Peabody earned commissions selling advertising for Time Warner. Three things had to occur for Peabody to earn a commission -- (1) procurement of the order; (2) broadcast of the advertising; and (3) collection of the revenue from the client. Every other week Time Warner paid her $769.23 in hourly wages, which was the equivalent of $9.61 per hour, based on a 40-hour workweek, but did not amount to one and a half times the minimum wage. Time Warner paid commissions every other pay period. Time Warner argued that it should be allowed to allocate the commissions after the fact to the pay periods in which they were earned.

The Supreme Court rejected the argument. "An employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall." Peabody v. Time Warner Cable, Inc., Case No. S204804 (July 14, 2014). In rejecting the argument, the Supreme Court declined to follow federal authorities applying the similar exemption available under the Fair Labor Standards Act. (See 29 U.S.C. section 
207(i).) There are too many differences between federal law and California law in the wage and hour area to draw upon federal authorities when interpreting the commissioned employee exemption.

Exemptions from Wage and Hour Requirements: Commissioned Employees

Federal and state wage and hour laws both exempt certain employees who earn commissions from their overtime requirements. The Fair Labor Standards Act contains the following exemption: "No employer shall be deemed to have violated subsection (a) by employing any employee of a retail or service establishment for a workweek in excess of the applicable workweek specified therein, if (1) the regular rate of pay of such employee is in excess of one and one-half times the minimum hourly rate applicable to him under section 6, and (2) more than half his compensation for a representative period (not less than 1 month) represents commissions on goods or services." 29 U.S.C. section 207(i).

To be "a retail or service establishment," it must engage in the making of sales of goods or services, 75 percent of its sales of goods or services, or of both, must be recognized as retail in the particular industry, not over 25 percent of its sales of goods or services, or of both, may be sales for resale. 29 CFR section 779.313. Congress meant to limit the exemption to employees of traditional local retail or service establishments. Service establishments refer to such local enterprises as restaurants, hotels, barber shops, and repair shops. The Department of Labor's regulations provide a list of establishments that qualify at 29 CFR section 779.320, and a list of those that do not at 29 CFR section 779.317.

Because of the limitation of the exemption to traditional local retail or service establishments, many well-paid commissioned employees do not qualify. This has led to several class action lawsuits by commissioned employees of financial services companies. Merrill Lynch agreed to pay $37 million to settle claims by its brokers. Citigroup agreed to pay $98 million to settle claims by its financial advisors.

The California wage orders exempt any employee whose earnings exceed one and one-half times the minimum wage if more than half of that employee’s compensation represents commissions. There is no limitation to local retail or service establishments as there is under the FLSA. However, the commissioned employee exemption only applies to employees who are involved principally in selling a product or service. See Areso v. CarMax, Inc., 195 Cal.App.4th 996 (2011).

Exemptions from Wage and Hour Rules in California

The California rules on exemptions differ in several respects from those under the federal Fair Labor Standards Act. In most respects the California rules take a narrower view of the exemptions. In one notable circumstance, the FLSA standard is more favorable to employees. Employers in  California must follow the rule that takes the narrowest view of the exemption.

White Collar Exemptions

There are exemptions for executive, administrative and professional employees under both state and federal law, but the specifics differ. Under both standards, the exempt employee generally must be salaried. The federal minimum is $455 per week. The state minimum is two times the state minimum wage (currently $8 per hour) for a 40-hour work week. That calculates to $2773 per month. Federal law requires that the exempt employee's primary duty fall within those by which the exemption is defined. State law requires that the exempt employee devote more than half his or her time to the defined duties.

Executive Exemption. The defined duties are essentially the same. The exempt employee (1) must manage the enterprise, or a customarily recognized department or subdivision of the enterprise, (2) must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent, and (3) must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Administrative Exemption. The defined duties are essentially the same, but the application to specific jobs differs. The exempt employee must (1) perform office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers and  (2) must exercise of discretion and independent judgment with respect to matters of significance. Although insurance claims representatives are exempt under the federal standards, they are not under the state standard. See Bell v. Farmers Ins. Exchange, 87 Cal.App.4th 805, 105 Cal.Rptr.2d 59 (2001).

Professional Exemption. Again, the defined duties are essentially the same, but the application to specific jobs differs. The exempt employee (1) must perform work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment, (2) the advanced knowledge must be in a field of science or learning, and (3) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual
instruction. Licensed professionals in the fields of law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting are exempt under both standards. Pharmacists are exempt professionals under federal law, but not under state law. Registered nurses are exempt professionals under federal law, but, under state law, only licensed nurse practitioners are.

Computer Professionals

Both federal and state law exempt highly skilled computer specialists who perform high-level duties. Under federal law they must earn at least $455 per week, or $27.63 per hour. Under state law, they must earn $38.89 per hour or annual salary of not less than $81,026.25 for full-time employment, and paid not less than $6,752.19 per month.

Outside Sales Persons

Under the FLSA, a salesperson is exempt if his or her primary duty is making sales, or obtaining orders or
contracts for services or for the use of facilities for which a consideration will be paid by the client or
customer, and he or she is customarily and regularly engaged away from the employer’s place of
business. State law has a similar exemption, but expressly requires that the employee spend more than half his or her time away from the employer's place of business.

Commissioned Employees

Under state law, an employee is exempt if more than half his or her compensation is commissions, and he or she earns at least one and a half times minimum wage. Under the FLSA, the commissioned employee exemption is limited to employees of retail or service establishments; auto, truck, trailer, farm implement, boat, or aircraft sales-workers; or parts-clerks and mechanics servicing autos, trucks, or farm implements, who are employed by non-manufacturing establishments primarily engaged in selling these items to ultimate purchasers. As a result, under federal law, employees of brokerage and financial services firms cannot qualify for the commissioned employee exemption.

Highly Compensated Employees

Department of Labor regulations promulgated under the FLSA provide an exemption for highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000, if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption. There is no such exemption under state law.

New California Employment Laws

California State Capitol

It has been a busy few weeks on the legislative front in California. After a closing flurry of activity from the legislature, Governor Brown this week finished signing and vetoing the various bills that made their way to his desk. Here are some new laws that will impact employers, beginning January 1, 2012:

SB 299: This bill prohibits an employer from refusing to maintain and pay for coverage under a group health plan for an employee who takes up to four months of leave because of pregnancy disability. This applies to all employers with five or more employees.

AB 22: This bill prohibits an employer or prospective employer, with the exception of certain financial institutions, from obtaining a consumer credit report, as defined, for employment purposes unless the position of the person for whom the report is sought is (1) a position in the state Department of Justice, (2) a managerial position, as defined, (3) that of a sworn peace officer or other law enforcement position, (4) a position for which the information contained in the report is required by law to be disclosed or obtained, (5) a position that involves regular access to specified personal information for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment, (6) a position in which the person is or would be a named signatory on the employer’s bank or credit card account, or authorized to transfer money or enter into financial contracts on the employer’s behalf, (7) a position that involves access to confidential or proprietary information, as specified, or (8) a position that involves regular access to $10,000 or more of cash, as specified.

AB 592: This bill would makes it an unlawful employment practice for an employer to interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right to leave under the California Family Rights Act or for pregnancy disability. The statute states that it is declaratory of existing law.

SB 459: This bill adds section 226.8 to the Labor Code. The new section makes it unlawful (1) to willfully misclassify an individual as an independent contractor, and (2) to charge misclassified independent contractors fees or make deductions from their compensation for items such as goods, materials, maintenance, licenses, or repairs. An employer who willfully misclassifies an independent contractor may be subject to a penalty of $5,000 to $15,000 for each violation, and, if the employer is found to have engaged in a "pattern and practice" of misclassifying employees as independent contractors, $10,000 to $25,000 for each violation.

AB 1396: This bill requires any employer who enters into a contract of employment involving commissions as a method of payment with an employee for services to be rendered within the state to put the contract in writing and to set forth the method by which the commissions are required to be computed and paid. The enactment was prompted by a federal court decision that invalidated Labor Code section 2751 because it only applied to out-of-state companies. Lett v. Paymentech, Inc., 81 F.Supp.2d 992  (N.D. Cal. 1999).

SB 272: Existing law requires an employer to grant a leave of absence to an employee who is an organ donor or a bone marrow donor. The leave of absence to an organ donor is up to 30 days in a one-year period. The leave of absence for a bone marrow donor is up to 5 days in a one-year period. The leave of absence for either donor is not a break in his or her continuous service for the purpose of his or her right to salary adjustments, sick leave, vacation, annual leave, or seniority. As a condition of an employee’s initial receipt of the leave of absence, an employer may require the employee to take a specified number of days of earned but unused sick or vacation leave, unless that would violate provisions of an applicable collective bargaining agreement. This bill would provide that the days of leave are business days rather than calendar days, and that the one-year period is measured from the date the employee’s leave begins and consists of 12 consecutive months. This bill would also provide that the leave of absence is not a break in the employee’s continuous service for the purpose of his or her right to paid time off. This bill would further provide that the employer may condition the initial receipt of leave upon the employee’s use of a specified number of earned but unused days for paid time off.

What Is A Commission?

The California wage orders exempt from the overtime rules "any employee whose earnings exceed one and one-half times the minimum wage if more than half that employee's compensation represents commissions." (See, for example, Wage Order No. 4, section 3(D).) Labor Codesection 204.1 defines "commission wages" as "compensation paid to any person for services rendered in the sale of such employer's property or services and based proportionately upon the amount or value thereof." Although that provision is limited to employees of vehicle dealers, the California Supreme Court has ruled it generally applicable to Labor Code provisions concerned with commissioned employees. See Ramirez v. Yosemite Water Co., 20 Cal.4th 785 (1999).

In a recent case, the Second District Court of Appeal in Los Angeles applied that definition to a CarMax plan that provided its sales consultants with a uniform dollar payment for each sale of a vehicle, lease, appraisal purchase and extended service plan, no matter what the sale price of the car. A class action lawsuit contended that the plan was not a true commission arrangement because the consultants did not receive a percentage of the price.

Earlier cases, including Ramirez, had concluded that pay was not commission wages unless unless the pay was a percent of the price of the product or service. See, e.g., Keyes Motors, Inc. v. Division of Labor Standards Enforcement, 197 Cal.App.3d 557 (1987). However, this Court found that CarMax's plan did provide for commission wages. It determined that the earlier cases had focused on the part of the definition that required a relationship to "value." But, the definition also provided that a commission could be based proportionately on "amount." In the case of CarMax, the amount that it paid its consultants was proportionate to the number (or amount) of cars sold. Areso v. CarMax, Inc., Case No. B219981 (May 20, 2011).

The Areso case is also instructive on the value of Labor Commissioner interpretations of the wage and hour laws. The Court of Appeal gave "no deference" to the DLSE Enforcement Policies and Interpretation Manual, because it was not adopted in accordance with the Administrative Procedure Act. But, DLSE opinion letters are not underground regulations, and may properly be considered.