Wage orders 4 and 7 (1) provide for an Inside Sales exemption, under which employees can be exempt from overtime if their earnings exceed 1 ½ times minimum wage and more than 50% of their compensation is from commissions.
It is very common for employers to have commission plans under which the calculation of commissions is done monthly or quarterly, often based on sales goals during a specified time period, and until recently there has been no binding precedent on whether the requirements for the Inside Sales exemption had to be satisfied every pay period (biweekly, semi-monthly or weekly).
On June 14, 2014, the California Supreme Court addressed this in Peabody v. Time Warner Cable, Inc. Susan Peabody was an exempt account executive with a base salary and commissions. During her 10 months of employment at Time Warner, she earned approximately $75,000 in total compensation. Following her separation from employment, she brought a class action alleging misclassification (as exempt) and seeking unpaid overtime and other wage & hour violations.
Time Warner argued that while she was paid a base salary that equaled $9.61 per hour, less than the 1.5 minimum wage requirement, when her commissions earned in a month were applied, her hourly earnings far exceeded the minimum. However, the court ruled that only wages and commissions actually paid in a pay period could be used to meet the minimum pay requirement; an employer cannot apply earnings actually paid in another pay period (such as commissions only paid once per month), to meet this.
While monthly or quarterly commission plans are acceptable, caution has to be exercised when implementing such a commission plan for Inside Sales positions where the employer treats those positions as exempt. It’s important to ensure:
- All hours within each pay period are paid at no less than 1.5 times minimum wage (currently: $9.00 x 1.5 = $13.50);
- Commissions should be paid in the next pay period after they are earned;
- If commissions are earned less frequently than each pay period, the base wage/salary must be at least $13.50.
Also, this is a partial exemption, only applying to overtime. That means the meal and rest period rules do apply to these positions. Employers need to maintain time records on Inside Sales staff to ensure compliance with the meal period rules and the required hourly compensation is sufficient.
(1) Wage Order 4 applies to Professional, Technical, Clerical, Mechanical and Similar Occupations. Wage Order 7 applies to the Mercantile Industry. For review of these wages orders, see http://www.dir.ca.gov/iwc/wageorderindustries.htm.