The Ninth Circuit has recently requested the California Supreme Court to address the proper method of calculating employee commission payments to determine qualification for California’s commission salesperson exemption set forth in the Industrial Welfare Commission (“IWC”) Wage Order Nos. 4 and 7. An employee generally can qualify for this exemption if: (1) they work for an employer who is covered by Wage Order Nos. 4 or 7; (2) the employee is paid more than one and one-half times the state minimum wage; (3)  more than half of the employee’s compensation represents commissions; and,  (4) the employee is primarily engaged in the sales of a service or product. However, California law currently provides no guidance as to how commissions should be allocated across pay periods to determine whether employees meet the one and one-half times minimum wage requirement.

The Ninth Circuit faced this issue in Peabody v. Time Warner Cable, (9th Cir. 10-56846 8/17/12). Peabody, a former sales executive, sued the Company for unpaid overtime. Working approximately 45 hours per week, Peabody’s base salary amounted to approximately $8.55 per hour without commissions. Peabody alleged she met the one and one-half minimum for the exemption only for those pay periods in which she received commissions. However, Time Warner paid commissions based on a “broadcast month” schedule, a period of four to five weeks. Time Warner argued that it could average those commissions across the entire broadcast month to meet the one and one-half time minimum wage for all weeks worked. Peabody argued that commissions could only be allocated to the pay period in which they were paid. Accordingly, Peabody argued that she fell short of the one and one-half times minimum wage requirement for approximately half of her pay periods.

The Ninth Circuit acknowledged that California law provides little guidance on the proper calculation of compensation for the purposes of the commissioned sales exemption. Faced with two competing methods, the Court requested that the California Supreme Court determine “whether an employer can average an employee’s commission payments over certain pay periods” to satisfy California’s compensation requirement for the exemption.

The Ninth Circuit has agreed to accept the California Supreme Court’s interpretation of the issue. The question is of particular importance to any employer under the two Wage Orders who are attempting to use the overtime exemption. Employers are also reminded that an employee must meet a state and federal overtime exemption in order for an employee to be exempt from both state and federal overtime requirements. There are potential situations where an employer could meet the California commission exemption but not meet the commission exemption under the Fair Labor Standards Act (“FLSA”), known as the Section 7(i) exemption. Also, employers who are not subject to Wage Order 4 or 7 should not attempt to utilize this commission exemption under California law. We will continue to provide updates on this issue as it develops.

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Photo of Jonathan A. Siegel Jonathan A. Siegel

Jonathan A. Siegel is one of the founding Principals of the Orange County, California, office of Jackson Lewis P.C. He practices before the Equal Employment Opportunity Commission, National Labor Relations Board, state and federal agencies and courts.

Mr. Siegel also provides advice and…

Jonathan A. Siegel is one of the founding Principals of the Orange County, California, office of Jackson Lewis P.C. He practices before the Equal Employment Opportunity Commission, National Labor Relations Board, state and federal agencies and courts.

Mr. Siegel also provides advice and counsel regarding labor and employment law with respect to various issues ranging from wage and hour law, reduction in force, WARN Act, discipline, leave management and harassment and discrimination issues. Mr. Siegel defends employers regarding different varieties of wrongful termination and discrimination claims.

Mr. Siegel has represented management in union organizing drives and regularly defends employers in unfair labor practice proceedings as well as in collective bargaining and arbitrations. He also has extensive experience conducting wage and hour preventive audits. He conducts single location and multi-location audits for employers. The scope of such audits can range from examining specific issues, i.e., exempt status under federal law and California, to comprehensive FLSA and California Labor Code audits. Mr. Siegel has conducted audits for a wide range of industries including, but not limited to manufacturing, retail, transportation, various service industries, defense contractors and healthcare.

Mr. Siegel regularly speaks on a variety of topics including wage and hour, harassment/discrimination, national and California employment trends, Workers’ Compensation, EEO, managing leaves of absence under FMLA and state leave laws and union avoidance. He has moderated numerous programs and is featured as a keynote speaker for several different organizations.