Pillsbury Winthrop Shaw Pittman

California Supreme Court ruling limits commission wage allocation

By Paula M Weber, Thomas N Makris and Osama E Hamdy

On 14 June 2014, the California Supreme Court held that employers could not satisfy California’s compensation requirements for the commission sales exemption by attributing commission wages paid in one pay period to other pay periods. This decision may have substantial impact on employers who pay employees on a commission basis, especially those employers who pay commission sales employees a base salary that is close to minimum wage.

In Peabody v Time Warner Cable Inc, Case No. S204804, Time Warner contended that a former account executive was not entitled to overtime pay because she fell into California’s ‘commissioned employee’ exemption. The exemption requires, among other things, that the employee’s earnings exceed one and one-half times the minimum wage. The exemption also requires that more than half of the employee’s compensation be commissions. Here, the plaintiff’s hourly wages were only $9.61 (£5.62) an hour so they alone did not satisfy the requirement the employee be paid one and one-half times minimum wage. These hourly wages were paid every other week. The plaintiff’s total compensation exceeded one and one-half times minimum wage when the hourly wages were combined with commissions paid the employee. However, commissions were paid only once a month. The commissions paid were earned throughout the proceeding one-month period.

As a result, it was undisputed that, during some pay periods, the employee’s earnings fell short of one and one-half times the minimum wage. In addition, it was undisputed that the plaintiff regularly worked 45 hours per week and was paid no overtime. Time Warner claimed that the employee’s commission payments should be reassigned from the bi-weekly pay periods in which they were paid to earlier pay periods in which they were earned. Time Warner argued that attributing commission wages in this manner would satisfy the exemption’s minimum earnings prong and therefore free Time Warner of the obligation to pay overtime. The California Supreme Court rejected this argument and concluded that it was impermissible for Time Warner to attribute commission wages in this fashion…

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