California’s Commisioned Employee Exemption

In a 2014 ruling, the California Supreme Court said that employees must be paid premium wages for any overtime worked in pay periods not qualifying for the exemption. This decision significantly impacts employers with commissioned salespeople. After this ruling, employers must be sure their employees receive 1.5 times minimum wage in every bi-monthly paycheck. To better understand the implication of this ruling, let us first take a look at the case that forced the California Supreme Court to split from federal law on commissioned employee exemption compliance.

Peabody v. Time Warner Cable, Inc.

Susan Peabody worked for Time Warner Cable as a commissioned salesperson. She received approximately $9.61 per hour for her 40 hours per week. In addition to her wages, Peabody received her commission wages every other pay period. Time Warner did not pay Peabody overtime as a commissioned employee. If Time Warner did not exclude Peabody from overtime pay, she would have earned at least 1.5 time minimum wage and half of their compensation in commissions.

When Peabody filed a class action suit against Time Warner for not paying her 1.5 times minimum wage in all pay periods, Time Warner responded by saying Peabody’s “periodic commission payments brought her monthly earnings above that threshold.” While the US District Court and 9th Circuit Court of Appeals agreed with Time Warner and granted their summary judgment motion, they asked the CA Supreme Court to review the case.

Very unexpectedly, the CA Supreme Court reversed the federal court’s decision and ruled in favor of Peabody. The Supreme Court found that commissioned employee exemptions depend on each pay period, not monthly wages as Time Warner has calculated. They said each employee must be paid bi-monthly and each bi-monthly pay period must include compensation equal to no less than 1.5 times minimum wage. Federal law allows commissioned employees to be paid monthly and qualify for the exemption based upon monthly compensation, but the California Supreme Court deviated from this.

In light of this ruling, we recommend all employers take a careful look at their commission programs and consider whether their program is in need of modification. Employees must be paid on a bi-monthly basis and the commission pay must be adequately spread to ensure compliance with this decision.

Source referenced: JD Supra

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