In deciding Peabody v. Time Warner Cable (SC S2048047/14/14), the California Supreme Court considered whether an employer may attribute commission wages paid in one pay period to other pay periods in order to satisfy California’s compensation requirements. The court held that employers may not attribute commissions to minimum wage obligations. In a decision bound to impact many California employers who pay their employees on a commission basis, the court concluded employers could not take credit for commission wages paid in future pay periods.
Plaintiff Peabody worked for Time Warner Cable, Inc. as a commissioned salesperson selling advertising on the company’s cable television channels. She received biweekly paychecks for $769.23 in hourly wages, the equivalent of $9.61 per hour, assuming a 40-hour workweek. In addition she received her sales commission wages approximately every other pay period. Commissions were paid pursuant to the company’s compensation plan, whereby an “account executive earned a commission only upon the occurrence of three events: (1) procurement of the order; (2) broadcast of the advertising; and (3) collection of the revenue from the client.”
After Peabody stopped working for Time Warner, she sued, alleging various wage and hour violations. It was undisputed that Peabody worked some overtime; however, Time Warner argued that she fell within California’s “commissioned employee” exemption and thus was not entitled to overtime compensation. The exemption requires, among other things, that an employee’s “earnings exceed one and one-half (1 1/2) times the minimum wage” (ibid.), i.e., $12 per hour. Time Warner acknowledged that most of Peabody’s paychecks included only hourly wages and were for less than that amount. It argued, however, that commissions should be reassigned from the biweekly pay periods in which they were paid to earlier pay periods. It reasoned that the commissions should be attributed to the “monthly pay period for which they were earned.” Attributing the commission wages in this manner would satisfy the exemption’s minimum earnings prong.
California Labor Code section 204, which also applies to commissioned salespersons, requires that “[a]ll wages . . . earned by any person in any employment are due and payable twice during each calendar month . . . .” While the California Supreme Court acknowledged that the Division of Labor Standards Enforcement (DLSE) allows employers to calculate commissions on a monthly basis or at whatever point they are earned, the court held that fact had no bearing on Labor Code section 204’s twice per month payment requirement.
The decision arguably undermines the long-standing practice to pay commissions on solely a monthly or quarterly basis. The court noted that the definition of “wages” includes amounts paid on a “commission basis,” holding that “all earned wages, including commissions, must be paid no less frequently than semi-monthly,” or at least twice each month. While there are a few statutory exceptions to this requirement, namely employees of licensed vehicle dealers, employees covered by collective bargaining agreements, and certain white-collar exempt employees, this holding can have dramatic implications for employers with commission sales forces.
Employers with commission sales employees must now ensure that each paycheck is in an amount equal to or greater than 1.5 times the minimum wage, i.e., at least $13.50 per hour at the $9.00 minimum wage for all hours worked. Following the 2013 decision of Gonzalez v. LA Motors, California employers are also strongly encouraged to review whether they properly compensate employees for non-productive time such as rest periods or other time not compensated by the commission payments.
