California Supreme Court Narrows Eligibility for the Commissioned Salesperson Exemption

California employers may qualify commissioned inside salespersons as exempt from overtime if they earn at least 1.5 times the state minimum wage for each hour worked with more than fifty percent of that total from commissions.  Some employers have considered an employee eligible if he or she met these requirements on average over several pay periods.  However, the California Supreme Court has recently ruled that the calculation must be made – and qualification determined – on what is earned and paid during each pay period.  Peabody v. Time Warner Cable, Inc. (July 14, 2014).  This may significantly lower the number of employers claiming this exemption for their workers.

Time Warner Cable classified its account executive Susan Peabody as an exempt commissioned inside salesperson.  For her sales of TV advertising, Time Warner paid Peabody regular wages on a biweekly basis (calculated per hour on a presumed 40 hour week).  The company also paid her monthly on commissions earned.  This meant that Peabody received at least one check per month for hourly pay only and at less than 1.5 times the minimum wage for all hours worked.

On Peabody’s lawsuit for unpaid overtime (including the claim that she usually worked 45 hours weekly), Time Warner argued the exemption applied by averaging her compensation over a month or more, i.e., that it should be permitted to apply portions of the monthly commission payments back to earlier pay periods where Peabody had originally received lower than the minimums required to qualify.

The California Supreme Court disagreed, unanimously ruling: “[A]n employer satisfies the minimum earnings prong of the commissioned employee exemption only in those pay periods in which it actually pays the required minimum earnings. An employer may not satisfy the prong by reassigning wages from a different pay period.”  Peabody v. Time Warner Cable, Inc.

The Court explained: “Making employees actually pay the required minimum amount of wages in each pay period mitigates the burden imposed by exempting employees from receiving overtime.  The purpose would be defeated if an employer could simply pay the minimum wage for all work performed, including excess labor, and then reassign commission wages paid weeks or months later in order to satisfy the exemption’s minimum earnings prong.” Peabody v. Time Warner Cable, Inc.

Two important lessons arise from the decision:

• Qualification for California’s inside sales exemption requires employee receipt of at least 1.5x minimum wage for every hour worked in the pay period.  With the July 1, 2014 increase of minimum wage to $9.00/hour, the minimum qualifying rate is thus currently $13.50 per hour; and

• To qualify a worker for the exemption, an employer may not attribute commissions paid in one period to other pay periods.

For more information, contact one of our attorneys, Timothy Bowles, Cindy Bamforth or Helena Kobrin.