California Supreme Court Invalidates Commission Agreement

On July 14, 2014, the California Supreme Court ruled that commission payments made in one pay period may not be used in another pay period to satisfy minimum payment requirements under the California commissioned employee exemption. Peabody v. Time Warner Cable, Inc. (California Supreme Court).

Susan Peabody, an account executive who sold advertising for Time Warner’s cable television channels, filed a class action in federal court, alleging that Time Warner, among other claims, failed to pay the minimum wage in weeks when Peabody was paid only hourly wages when she worked more than 48 hours.  Time Warner paid Peabody $769.23 biweekly, and with additional payments of commissions paid every other pay period.  Where Peabody worked more than 48 hours in a workweek, or 96 hours over the bi-weekly pay period, the $769.23 fell below the minimum wage for each hour worked.

The trial court granted summary judgment in favor of Time Warner. Peabody appealed, and the Ninth Circuit affirmed as to Peabody’s commission wages claim. However, the court determined that underlying the remaining issues was the “question of whether Peabody’s commissions can be allocated over the course of a month, or whether the commissions must only be counted toward the pay period in which the commissions were paid.” Finding no clear controlling precedent in California case law, the Ninth Circuit asked the California Supreme Court to answer that question.

The California Supreme Court held that an employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall, and that an employer satisfies the minimum earnings prong of the commissioned employee exemption only in pay periods in which it actually pays the required minimum earnings. The Court found that an employer may not satisfy the minimum compensation prong by reassigning wages from a different pay period.

What This Means for Employers

Employers with commissioned employees desiring to take advantage of the overtime exemption will want to review their commission agreements in light of the Peabody decision.  This decision does not mean that commissions must be paid weekly, or in each pay period.  However, for an employee to qualify for the commissioned employee overtime exemption under California law, the employee must earn an equivalent to 1.5 times the minimum wage for each hour worked in each pay period, and more than half of the employee’s compensation must come from commissions.  See Industrial Welfare Commission Wage Order No. 4, Section 3(D).

This exemption is only available to employers governed by Wage Orders 4 (professional, technical, clerical, mechanical and similar occupations) and 7 (mercantile industry) in California.  Keep in mind that the California minimum wage increased to $9.00 per hour on July 1, 2014, meaning the minimum hourly rate under this exemption increased to $13.50 per hour.

It is also important to note that California employers must also satisfy the federal commissioned employee exemption, which is even more narrow than California requirements, because it requires that the employee be employed in a traditionally “retail” position.  See 29 USC Section 207(i); 29 CFR Section 779.317.

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