Commissioned Employees May Be Entitled To Overtime Under Peabody v. Time Warner

Ms. Peabody was a short-time employee who caused Time Warner a long-term headache!  (Peabody v. Time Warner Cable, Inc. 2014 Cal. LEXIS 4755.)   She sold advertising on Time Warner’s cable television channels.  The company paid her the equivalent of $9.61 per hour (assuming no overtime) in each bi-weekly pay period.  The company calculated, and paid, her commissions about every other pay period. 

Ms. Peabody claimed that she regularly worked 45 hours or more each workweek but was never paid overtime compensation.  The company did not dispute the claim that Ms. Peabody worked overtime and lack of overtime compensation.  Rather, the company contended that because she earned at least one and one-half times the minimum wage and because at least 50 percent of her compensation was in the form of commissions, she was exempt from overtime compensation.  This exemption from overtime is referred to as the commissioned employee exemption or an inside sales exemption. 

The real issue arose because commissions were not always paid in the pay period in which they were earned.  The company contended that the commissions paid should be attributed to the “monthly pay period for which they were earned.”  In other words, the company claimed it could attribute commission wages paid in one pay period to another pay period to satisfy the exemption requirements.  Ms. Peabody claimed that because she did not receive commissions earned in corresponding pay periods, that she did not meet the commissioned employee exemption.  She claimed that because many of her paychecks were less than one and one-half the minimum wage – due to commissions not being paid in those pay periods – that she was not an exempt commission employee. 

The California Supreme Court stated the question as follows:  Whether commissions can be allocated over the course of a month, or whether the commissions must only be counted toward the pay period in which the commissions were paid. 

The court noted that section 204(a) of the Labor Code requires the payment of all wages, including commission wages, twice each month.  Once earned, the commission must be paid.  The court also ruled that an employer cannot attribute wages actually paid in one pay period to a prior pay period to cure a shortfall.  Reassigning wages to a prior pay period violates section 204(a).  In addition, reassigning pay to a prior pay period results in a violation of section 226 of the Labor Code which requires an itemized statement listing gross wages earned in the pay period. 

The court’s decision is consistent with the position taken by the Division of Labor Standards Enforcement (“DLSE”).  In its Enforcement Manual, the DLSE determined that the payment of one and one-half the minimum wage must be made in each pay period, without reassignment of wages to a different pay period.  (DLSE Manual, section 50.6.1.) 

The court’s ruling should not be a surprise, given the position taken by the DLSE for many years.  Nevertheless, I suspect that many employers have done what Time Warner did – reassign wages to a different pay period to meet the requirements of the commissioned employee exemption.  Companies who have done so have already incurred liability for unpaid overtime compensation, penalties under section 226 for providing inaccurate paycheck stubs, waiting period penalties and attorneys’ fees. 

Moving forward, employers may have difficult applying the commissioned employee exemption.  Commissions will need to be determined, and paid, each pay period.  For some businesses, that means every week.  This is a daunting administrative challenge. 

Some employers may consider raising the hourly rate so that the rate of pay is always at least one and one-half the minimum wage.  However, that raises another problem.  For the exemption to apply, at least 50 percent of the employee’s wages must be in the form of a commission.  Thus, the employee will need to earn a greater amount in commissions in order to be exempt.   

A business may be tempted to pay commissions in the form of a draw against future commissions.  This too is problematic.  What if the employee does not earn enough commission to go against the draw?  Moreover, is a draw actually a commission?  If not, the employer may creating additional liability because the commissioned employee exemption still has not been met. 

Employers should also keep in mind that the commissioned employee exemption is a partial exemption only.  This means that other provisions of the wage orders still apply, such as the recording of time worked and providing meal and rest periods. 

Interested in reading the case?  Here’s the link -- http://www.courts.ca.gov/opinions/documents/S204804.PDF

Call if you have questions about the Peabody case, or the application of the commissioned employee exemption to your workplace.