A recent decision by California’s Second District Court of Appeal on commission-based pay for rest breaks raises more questions than it answers. And if it isn’t accepted by California’s Supreme Court for review, or contradicted by another appellate court, it will likely lead to an increased risk of litigation for any California employer paying on a commission basis.
Vaquero v. Stoneledge Furniture, LLC, concerned the propriety of a commission-based pay policy in which employees were guaranteed to earn minimum wage for all time worked, including rest periods. Employees whose commissions alone did not guarantee a minimum wage for such time were provided an advance on future commissions.
California has long recognized the legitimacy of commission based pay – where employees earn draws in one period against future commissions. The agency overseeing wage enforcement in California, the Division of Labor Standards Enforcement, expressly acknowledges it as a compensation option. The Division’s Manual states in part, that if an employee receives a draw against commissions to be earned at a future date, the draw must be equal to at least the minimum wage and overtime due the employee for each pay period. It also states that although the draw may be reconciled against potential future commissions, the draw is considered the basic wage and is due for each period the employee works.
The Trial Court Decision and the Appeal
In Vaquero, the trial court concluded that the employer’s pay practice was lawful because it met this minimum wage requirement; that is, the draw constituted the basic wage. On February 28, 2017, the Second District Court of Appeal overturned the trial court, ruling that rest periods were in fact not adequately compensated.
The Court reasoned that in weeks where a salesperson had to rely on a draw against future commissions to earn minimum wage, he or she had no more than a loan from future wages – not actual payment for rest breaks. The Court ruled that this policy violated regulations barring employers from deducting wages for a rest break.
The Court of Appeal’s opinion is based on recent state and federal cases holding that where employees are paid on a piece rate system, pursuant to which earnings are based upon the number of tasks performed or goods produced, they must be separately paid for rest periods.
These piece-rate cases conclude that absent such separate pay, employees who take their rest breaks will be penalized because their earnings will stop during the rest period. This cessation of earnings conflicts with the requirement that rest breaks be paid. The Court in Vaquero borrowed from this rationale and went so far as to hold that commissions by themselves cannot be considered payment for rest breaks because employees cannot be selling or promoting a sale while off-duty.
Are You Confused?
If you are, it’s probably because the Court equating commission to piece rate pay systems – although a logical step according to the Court – triggers numerous uncertainties about commission-based pay systems. Here’s why:
- Paid at What Rate? First, although the Court made clear that rest periods for commission earning salespersons must be separately paid, and must be paid at least minimum wage, it did not state what rate applies. Newly enacted Labor Code Section 226.2 requires employers paying on a piece rate basis to pay for rest period time at the greater of minimum wage or the average hourly rate for non-rest periods. The Court noted that Section 226.2 does not expressly apply to commission pay practices, but suggested that it could not be read to require different or less stringent protection for commission-based employees.
- Where’s the Guidance? Second, the Court did not address the employer’s subsequently adopted policy of paying its commissioned sales staff an hourly rate which met or exceeded minimum wage plus commissions. So there is no guidance as to whether an employer can pay rest periods at this base hourly rate. There is no guidance as to whether any such practice would ensure that an employee had no wages deducted for taking a rest break.
- What is the Regulatory Prohibition against Deductions for Breaks? Third, the Court failed to acknowledge any ambiguity in the regulatory prohibition against deducting from wages for a rest break. Although seemingly a simple mandate, it becomes more complex when compensation is based on commissions earned for the sale of goods or services, particularly where those commission payments cannot be tracked to any particular day or hour or minute. Arguably, a pay system which encourages rest periods and pays employees their full commission notwithstanding ten minutes off duty every four hours complies with the letter and spirt of that mandate. Under the Vaquero decision however, the legitimacy of that practice is in doubt.
- What is Required of an Employer by the Decision? Fourth, the Court failed to address the impact of its conclusions on the Labor Code’s requirement that all commission agreements must be in writing. Employers with such agreements presumably must go back to the drawing board to rewrite them to include a rest period component. But it is unclear whether this is required. The Court also suggested but did not specifically require that the rest period payments be reflected on pay stubs.
Absent further guidance from the courts or the legislature or both, commission-based pay systems are likely to be subject to increased scrutiny from litigators and the courts. Payment of minimum wages will not necessarily insulate those systems from court challenges. Class actions will challenge every conceivable sort of commission-based pay system, and employers will be forced to guess whether their long-established and once-deemed conventional pay practices should remain in effect.