The California Supreme Court has narrowed application of the “commission exemption” from overtime, dealing employers a setback in Peabody v. Time Warner Cable, Inc., No. S204804 (Cal. Jul. 14, 2014). Under Wage Orders 4 and 7, sales employees who earn more than 50 percent of their wages in commission and earn at least 1.5 times the state minimum wage may be exempt from California overtime requirements. The California Supreme Court ruled that an employer may not attribute commission wages paid in one pay period to other pay periods to satisfy California’s compensation requirements of earning at least 1.5 times the state minimum each pay period. The Court stated:

In conclusion, we hold that an employer satisfies the minimum earnings prong of the commissioned employee exemption only in those pay periods in which it actually pays the required minimum earnings. An employer may not satisfy the prong by reassigning wages from a different pay period.

Employers are reminded that this decision affects only employers under Wage Orders 4 and 7 since the commission exemption is stated only in these two Wage Orders. Employers still need to verify that the sales employees meet an overtime exemption under federal law. Employers relying on the “commission” exemption should consult with their legal counsel and conduct a review of their payroll procedures.