hr blog
California Supreme Court Clarifies Requirements of Commissioned Employee Exemption
Based on an article written by Stacey E. James and Joshua D. Levine with Littler Mendelson, there has been substantial litigation regarding whether and how employers may satisfy California minimum wage requirements for compensation plans involving commissions. In Peabody v. Time Warner Cable, Inc.k the California Supreme Court cleared up at least one source of confusion by concluding that employers must actually pay sufficient wage each pay period to satisfy the state's minimum wage requirements and the minimum compensation requirements for California's commission sales exemption. Employers may not allocate commissions paid in one pay period to satisfy minimum compensation shortfalls in prior pay periods.
What does this mean? Under the case, an employer must pay more than 1.5 times minimum wage for every hour worked each pay period to employees classified as exempt under the commissions sales exemption. An employer cannot satisfy this minimum compensation obligations by allocating commissions paid in later pay periods to wage shortfalls in earlier pay periods. This is true even when work done to help earn the commissions was completed in the earlier pay periods. Rather, an employer must pay at least minimum wage for every hour worked each pay period.
The California Supreme Court largely rested on Labor Code section 204, which states that all wages earned are due and payable at least twice each calendar month, and on the commissions sales exemption, which states that an employee must earn more than 1.5 time the minimum wage to qualify for the exemption. While the court appeared to acknowledge that employers need not pay unearned commissions each pay period, the court held that an employer must pay wages in excess of 1.5 times minimum wage for every hour worked each pay period in order to satisfy the commission sales exemption.
Furthermore, an employer must pay at least the minimum wage ($9 per hour) for every hour worked each pay period to satisfy its minimum wage obligations (as outlined in Wage Order No. 4, subd. 4(B)) requires employers to "pay to each employee, on the established payday for the period involvved, not less than the applicable minimum wage for all hours worked in the payroll period...."
Employers that classify employees as exempt under the California commission sales exemption should carefully review their pay policies in light of Peabody to ensure compliance with California's minimum compensation requirements. Employers should also consider reviewing their payment amounts to employees covered by the exemption to ensure they are actually receiving in excess of 1.5 times the minimum wage for every hour worked each pay period regardless of how often commissions are earned.