Commissioned Employees and California’s Overtime Laws

In California, an employer is required to pay its employees overtime if the employee works in excess of eight hours a day or more than forty (40) hours a week. Overtime is compensated at the rate of no less than one and one-half times (1 ½) the regular rate of pay for an employee. However, there are certain employees who are exempt from this general overtime requirement, depending on their profession and/or compensation structure. One of these exemptions applies to employees whose compensation is based upon commissions. The Industrial Welfare Commission Wage Orders provide that, “employees (except minors) whose earnings: (1) exceed one and one-half times the minimum wage; and (2) more than half of their compensation represents commissions,” are exempt from the general overtime provision. This is the California Overtime Law.

As such, it is important to note that just because an employee earns some commissions, the exemption does not automatically apply. The exemption only applies to the employee if both prongs are met.

A relatively recent and important case that touched upon this issue was the case of Peabody v. Time Warner Cable, Inc., 59 Cal.4th 662, 663 (2014) (“Peabody”) which resulted in a published 2014 decision by the California Supreme Court. There, Ms. Peabody, the employee who worked for Time Warner Cable, Inc. (“Time Warner”), received paychecks that encompassed both hourly wages and commission wages. After leaving her employment with Time Warner, she sued for overtime wages, among things, based upon the claim that she regularly worked 45 hours per week and occasionally 48 hours per week. Although Time Warner did not dispute the fact that Ms. Peabody worked 45 hours per week and was paid no overtime, it argued that she fell within California’s “commissioned employee” exemption and thus was not entitled to overtime compensation. At the time of the lawsuit, the minimum wage in California was $8.00 per hour. As such, in order for the “commissioned employee” exemption to apply, Ms. Peabody’s compensation must have amounted to no less than $12.00 per hour. Time Warner reasoned that even though most of Ms. Peabody’s checks included only hourly wages and were for less than $12.00 per hour based upon the hours she worked, the commissions should be attributed to the “monthly pay period for which they were earned,” and that attributing the commission wages in this manner would satisfy the exemption’s minimum earnings prong. The district court bought this argument and dismissed the case. Upon appeal, the Ninth Circuit struggled with the issue of whether the employee’s commissions must only be counted toward the pay period in which the commissions were paid or where they can be allocated over the course of a month.” Due to the absence of controlling precedent, the Court of Appeal affirmed the district court’s ruling with respect to the overtime claims.

The California Supreme Court ultimately held, however, that Time Warner cannot attribute wages paid in one pay period to a prior pay period to cure a shortfall with respect to the minimum earnings prong and whether the minimum earnings prong is satisfied depends on the amount of wage actually paid in a pay period. This decision was definitely a win for commissioned employees as it serves to deter employers from deferring the payout of commissions to weeks or months later in order to satisfy the minimum earnings prong — a practice that is relatively common amongst California employers.

Based on the above, employees whom are not receiving overtime compensation and whose earnings are entirely commissioned-based, or is comprised of both commissions and hourly wages, need to be wary of how much they are being paid in light of the number of hours they are actually working to ensure that their compensation for each pay period meets the minimum earnings prong. If you suspect that your employer is improperly relying on this “commissioned employee” exemption to avoid paying you overtime compensation, contact an unpaid overtime attorney immediately to discuss your rights.

For more information on California Overtime Law and your personal situation involving unpaid overtime, make an appointment with one of our attorneys or call and ask for Kashif or Sam at (949) 379-6250.