July 29, 2014

It’s Time to Revisit Commission Pay for California Employees: Commissions Earned Must be Paid Twice Per Month and the Commissioned Sales Exemption Gets Harder to Meet

You may have just started breathing easier after rolling out written commission agreements to comply with California Labor Code section 2751.  However, a recent unanimous California Supreme Court decision has heads turning and tongues wagging once again on this topic. 

In Peabody v. Time Warner Cable, Inc., the California Supreme Court held that Time Warner’s commission pay practices were not consistent with California law.  Labor Code section 204 requires commissions, once earned, to be paid semi-monthly (“twice during each calendar month”).  In addition, the commissioned salesperson exemption only applies where the employee makes more than one and one-half times the minimum wage for “each workweek and [is] paid [that amount] in each pay period.”

Time Warner Cable employed Susan Peabody as a commissioned salesperson, selling advertising on cable television channels.  It paid her hourly wages on a biweekly basis and commissions once per month (approximately every other pay period).  After her employment as an account executive ended, she brought a wage and hour complaint in state court.  Time Warner Cable removed it to federal court, where it obtained dismissal of the entire action through summary judgment.  After Peabody appealed, the Ninth Circuit requested that the California Supreme Court rule on the appeal.

Peabody received $769.23 every other week in hourly wages ($9.61 per hour for a 40 hour workweek).  Approximately once per month, she received the commission pay that she earned that month.  Time Warner did not pay Peabody overtime, determining that she was exempt under California’s commissioned salesperson exemption, covering employees who earn more than one and one-half times the minimum wage and whose compensation is made up of more than 50 percent commissions.  The Court disagreed with Time Warner’s analysis.  It found that Labor Code section 204 requires that “’[a]ll wages . . . earned by any person in any employment are due and payable twice during each calendar month . . . .’”  It noted that the California Legislature had carved out certain exceptions to this pay system for certain executive, administrative, and professional employees and commissioned car salespersons.  No such carve out existed for Peabody.  The Court also explained that while the Division of Labor Standards Enforcement may allow employers to calculate commissions on a monthly basis or at whatever point they are earned, that fact had no bearing on Labor Code section 204’s twice per month payment requirement.

Next, it turned to the issue of whether Time Warner could attribute the commissions to the pay periods in which they were earned in order to meet the commissioned sales exemption’s requirement that an employee make one and one-half the minimum wage for each hour worked.  The Court’s answer was a resounding “no.”  The Court held that to decide whether a commissioned salesperson makes more than one and one-half times the minimum wage for each hour worked, you look at only the wages paid during that pay period.  “An employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall.”  The Court was not shy in announcing that “[t]his interpretation narrowly construes the exemption’s language against the employer with an eye toward protecting employees.”

The decision makes clear that employers with commissioned salespeople who are utilizing the commissioned salesperson exemption under the applicable Wage Order need to immediately assess two issues: 1) are they paying those employees all wages due on a semi-monthly (approximately twice per month) basis and 2) are those employees making one and one-half times the minimum wage for every hour worked in each semi-monthly pay period?  If not, please call your friendly neighborhood wage and hour expert.