Wage Payment Requirements for Commissioned Salespersons Exemption 07.28.2014

2014-09-25 08:44
In July 2014, the Supreme Court of California issued an opinion in Peabody v. Time Warner Cable, Inc. regarding the pay of commissions to commissioned salespersons to ensure qualification under the commissioned salesperson exemption of the California Wage Orders.

The Issue Addressed by the Court

Whether monthly payment of commissions to commissioned salespersons can be retroactively applied and averaged with prior pay-periods to bring a commissioned salesperson’s wages within the required 1.5x minimum wage requirement.

The Short Answer

No. A commissioned salesperson must receive no less than 1.5x minimum wage in each pay period and the pay received must be comprised of no less than 50% based upon commissions earned.
For employees paid on the following schedule the minimum wages required for each pay period are as follows:

Bi-weekly pay periods: $1,080 per pay period
Bi-monthly pay periods: $1,170 per pay period

Payment less than the above specified amount will disqualify a commissioned salesperson from the exemption and can lead to liability by the employer for unpaid overtime, meal breaks, rest breaks, and other penalties.

Analysis of the Court’s Decision

Commissioned salespersons in California are exempt from overtime and other wage requirements where the commissioned salesperson receives more than 50% of their total overall wages from commissions and their total salary each pay period is more than 1.5x the minimum hourly wage. At present, the minimum hourly wage in California is $9.00 per hour, and means that commissioned salespersons must make no less than $13.50 per hour for a 40 hour workweek (7 days).

Time Warner was attempting to pay their commissioned salespersons with a short paycheck once a month (less than 1.5x the minimum wage for 40 hours of work per week) and make up the difference by paying commissions once a month. The Court decided that this practice violates California law and destroys the exempt status of the commissioned salesperson. The Court reasoned that in order to maintain the exempt status of the employee, the employee must make no less than 1.5x the minimum hourly wage for 40 hours of work per week in each and every pay period. Because Time Warner failed to do this, the employee lost her exempt status and Time Warner was subject to overtime, meal and rest breaks, and other penalties as a result of this misapplication of the employee’s commission payments.

Avoiding this Problem using Draws

Our clients that use commissioned salespersons can avoid this problem by ensuring that each commissioned salesperson receives no less than $1,080 in each pay check (if paid bi-weekly) and $1,170 in each pay check (if paid bi-monthly). To maintain the 50% earned by commission’s prong of this exemption, employers are able to use a commission draw system to pay commissions. This means that each employee would be paid the above minimum rate and any amount over 50% of the total paid would be later deducted from the employee’s earned commissions at the end of the month.

Setting up a proper commission draw pay system is important to maintaining the commissioned salesperson’s exempt status. Our office can assist clients in developing, implementing, and auditing their commission pay systems to ensure complete compliance with the law. Please contact our office should you have any questions regarding this matter.
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