New Developments for California Employees Paid on a Commission Basis: Avoiding Traps for the Unwary Michael N. Westheimer Ruth L. Seroussi Buchalter Nemer PC Buchalter Nemer PC 55 Second Street, Suite 1700 1000 Wilshire Blvd., Suite 1500 San Francisco, California 94105 Los Angeles, California 90017 Direct: (415) 227-3530 Direct: (213) 891-5149 Email: mwestheimer@buchalter.com Email: rseroussi@buchalter.com
Agenda New Cal. Supreme Court decision» Peabody v. Time Warner Cable, Inc. Recent legal theories from plaintiff s bar Exempt classifications Written commission plan requirements» Cal. Labor Code 2751 Claims for post termination commissions
Peabody v. Time Warner Background Facts Employee compensation: annual base salary of $20,000 (= $9.61 per hour), plus commissions Company issued commission payments once per month Employee regularly worked 45 hours per week Company classified employee as exempt under the commissioned sales exemption, did not pay overtime for work in excess of 8 hours per day or 40 hours per week
Peabody v. Time Warner Allegations Employee alleged she was entitled to overtime because wages were too low to meet exemption requirement that earnings exceed 1½ times minimum wage (currently must be more than $13.50 per hour) Company asserted that commissions averaged over the month they were earned exceeded earnings threshold Issue to Be Decided In applying the commissioned sales overtime exemption, can a commission payment be averaged over the time period for which the commission is earned?
Peabody v. Time Warner Cal. Supreme Court s Answer Employer may not attribute commission wages paid in one pay period to other pay periods to satisfy the minimum earnings requirement of the exemption Minimum earnings exemption requirement and compliance with minimum wage are determined workweek by workweek, based on wages paid each pay period Unanswered Question Peabody did not address another commissioned sales exemption requirement that at least 50% of pay must be commissions DLSE: also must be satisfied each workweek; whether the employer is paying a bona fide commission is determined by reviewing commissions for a representative period of at least one month
Peabody v. Time Warner Takeaways Peabody does not prohibit monthly or quarterly commission plans, but pay must be structured to comply with wage requirements Employee must receive at least minimum wage (currently $9 per hour) each pay period For commissioned sales exemption:» employee must get more than 1½ times minimum wage (currently more than $13.50) each pay period» DLSE: ok to satisfy exemption test by paying an advance or draw each pay period, but must be a bona fide commission Minimum wage increases to $10 per hour on 1/1/2016
Recent Plaintiff Theories Armenta v. Osmose (2005) 135 Cal.App.4th 314 Employees were not compensated for nonproductive work time, but weekly pay exceeded minimum wage Court rejected averaging (permissible under FLSA), minimum wage standard affixes for each hour worked Recent Plaintiff Theories 1. Commissions inadequate for non sales activities 2. Commissions inadequate for paid rest breaks
Recent Plaintiff Theories Gonzalez v. Downtown LA Motors (2013) 215 Cal.App.4th 36 Auto mechanics were paid piece rate for tasks performed, employer made up difference if weekly pay was under minimum wage Court still found minimum wage violation due to impermissible averaging, ruled nonproductive time must be separately paid Bluford v. Safeway (2013) 216 Cal.App.4th 864 Pay structure of piece rate for various tasks and hourly rate for store set up and driving delays did not provide paid rest breaks Balasanyan v. Nordstrom (S.D. Cal. 2012, 2013) Sales associates were paid draw commissions with guaranteed minimum (measured by hourly rate), alleged they were improperly compensated with commissions for non sales activities Court denied employer s MSJ, certified California class action
Recent Plaintiff Theories Takeaways Commission only plans are becoming increasingly risky Consider hybrid compensation structure, commissions in combination with hourly or other type of pay Consider providing separate compensation (at least minimum wage) for non sales time: i.e., pre opening, post closing, administrative meetings, rest breaks, nonproductive work time, performing tasks not directly related to sales activities
Exempt Classifications Key Overtime Exemptions Commissioned Sales Outside Sales Administrative Highly Compensated Employee (federal only) Employees are presumed non exempt, overtime eligible Employer has burden to prove exemption applies Exemption tests are narrowly construed Misclassified employee s estimate of amount of overtime worked is given substantial weight if employer did not keep time records
Exempt Classifications Commissioned Sales Exemption Federal Elements Employee of a Retail or Service Establishment» Recognized as a retail sales or service in the particular industry, 75% annual dollar volume of sales of goods/services not for resale Regular rate of pay exceeds 1½ times federal minimum wage (more than $10.88 per hour) More than half of earnings in a representative period (one month to 12 months) consists of commissions Recordkeeping Accurate records of hours worked each workday and workweek Commission plan or memorandum summarizing terms
Exempt Classifications Commissioned Sales Exemption California Elements Employee of employer governed by Wage Order 4 or 7»4: professional, technical, clerical, mechanical or similar occupations»7: mercantile industry Earnings exceed 1½ times federal minimum wage (currently more than $13.50 per hour) More than half of earnings represent commissions Limited Exemption, Overtime Only Does not exempt other provisions of wage order: i.e., meal periods, rest periods, records of shift and meal period start and end times
Exempt Classifications Outside Sales Exemption Elements Makes sales, or obtains orders or contracts for services or for use of facilities for which a consideration is paid Customarily and regularly works away from employer s place of business (i.e., door to door salesperson)» Federal: employee s primary duty» California: over half of employee s work time Fixed site used as headquarters or for solicitation of sales is considered employer s place of business, including home office Exemption is not based on how employee is compensated
Exempt Classifications Administrative Exemption Duties Test Performs office or non manual work directly related to management policies or general business operations» Federal: employee s primary duty» California: over half of employee s work time Customarily and regularly exercises discretion and independent judgment on matters of significance in performing those duties Salary Test: paid on a salary basis Federal: at least $455 per week ($23,660 annual) California: at least twice minimum wage (currently at least $37,440 annual)
Exempt Classifications Highly Compensated Exemption Federal Only Elements Total annual compensation of $100,000 or more At least $455 per week ($23,660 annual) is paid on a salary basis Customarily and regularly performs at least one of the exempt duties of the executive, administrative or professional exemptions California does not recognize the highly compensated exemption for state law purposes
Exempt Classifications Takeaways If an employee is classified as exempt, confirm applicability of the exemption test for the specific exemption(s) relied on Be aware of the parameters and limitations of the specific exemption(s) relied on, and what information may be required to establish the exemption applies If in doubt, consider an internal review of exempt classifications (and possibility of conducting the review under protection of attorney client privilege)
California Statute California Labor Code 2751 (effective 1/1/2013) Commission plan must be writing, setting forth the method by which commissions are computed and paid Employer must provide a signed copy to all employees who are parties to it, and obtain a signed receipt If plan expires and employee continues to work, the plan is presumed to remain in full force and effect until superseded by another plan or employment terminates
Post termination Commissions Disputes can arise over whether employee is entitled to additional commission payments after termination Nein v. HostPro (2009) 174 Cal.App.4th 986 Court denied post termination commissions based on provision that employee will be eligible for commission pay so long as [he] remains employed with the Company as a Sales Representative DLSE Position Commissions are to be paid when they are earned and ascertainable, which may result in payment post termination
Post termination Commissions Commission Plan Terms Clear and unambiguous verbiage Criteria for eligibility for a commission Precise definition of how commission is calculated» Percentage of: sale price, revenue received, etc.» What happens if customer cancels, returns, fails to pay Conditions that all must be satisfied before a commission is considered earned» Ongoing duties to service account after booking? Description of when commissions are paid» Due when earned and ascertainable» Advances, draws, chargebacks
Post termination Commissions Takeaways Written commission plan Employee signs acknowledgement of receipt New plan is issued before previous plan expires Clear, precise, thorough, unambiguous plan terms
Questions? Michael N. Westheimer Ruth L. Seroussi Buchalter Nemer PC Buchalter Nemer PC 55 Second Street, Suite 1700 1000 Wilshire Blvd., Suite 1500 San Francisco, California 94105 Los Angeles, California 90017 Direct: (415) 227-3530 Direct: (213) 891-5149 Email: mwestheimer@buchalter.com Email: rseroussi@buchalter.com