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Big Rest Period News for California Inside Sales Employees Paid via Draw and Commission

by D. Gregory Valenza | | March 2, 2017

The courts are making the simple rest period obligation a nightmare for employers.  A little background – 

At the end of the year, the California Supreme Court walloped employers with its Augustus v. ABM decision.  Recall that case held that employees must be relieved of all duty for 10-minute rest periods. That means employees cannot be required to be “on call” to respond if a problem arises, or the rest period is not legally compliant. 

You may also recall that rest periods are paid time. And employee paid by the “piece” (such as people who produce goods and are paid by the unit, truck drivers paid by the mile driven, and others), must receive separate pay for rest periods. That is, if you pay a mechanic $25 to do one oil change, the 10 minute rest period cannot be included in that oil change pay. The employer must pay at least minimum wage during rest period time (20 minutes of paid rest time for an eight hour day).  After courts decided this issue about piece rates, the California legislature decided to enact a statute, Labor Code section 226.2, which covers this issue in detail.

A commission is not a piece rate, though. So, section 226.2 and the case law about piece rates and rest periods do not apply to commission arrangements. Or do they?  Read on.

Many salesperson are paid a draw against commission, aka a “recoverable” draw.  For example, to ensure employees are paid at least minimum wage every pay period for all hours worked, the employer will pay an hourly rate (such as minimum wage), and then apply that as an “advance” towards later earned commission payments. This arrangement is especially important when a commission is not earned until a future date, such as for larger items, or for subscriptions, etc.  What typically will happen is that when the commission check comes in, the employer will pay the difference between the commission and the amounts already advanced.  

The “amount already advanced” was an hourly rate. So, no  problem with matters such as minimum wage per hour, or paid rest periods. Amiright?  Well, no.  Not as of yesterday afternoon.

The Court of Appeal just held in Vaquero v. Stoneledge Furn. that the employer with a draw-against-commission formula has not paid any rest period time separately. Why? Because the commission rate is payment for the items / services sold. The “draw” is just an advance of the commission. So, the net-net is that rest periods are not “paid” separately.  You’re not selling when you’re resting. So, the commission cannot “include” the rest period time.  Get it? 

Here’s how the Court of Appeal put the question:

Are employees paid on commission entitled to separate compensation for rest periods mandated by state law? If so, do employers who keep track of hours worked, including rest periods, violate this requirement by paying employees a guaranteed minimum hourly rate as an advance on commissions earned in later pay periods? We answer both questions in the affirmative, and reverse the trial court’s ruling granting summary judgment in favor of the employer.

And here’s how they analyzed the answer:

Stoneledge contends that its commission plan complied with California law by “counting as hours worked” the time sales associates spent taking rest breaks and not deducting from wages for those hours. These arguments misinterpret California law and ignore how Stoneledge’s commission agreement worked.

We agree with Stoneledge that, under the commission agreement in effect during the class period, the company did in fact keep track of hours worked, including rest periods. We also agree that the company treated “break time identically with other work time.” The problem with Stoneledge’s compensation system, however, is that the formula it used for determining commissions did not include any component that directly compensated sales associates for rest periods. **** Stoneledge’s commission agreement did not compensate for rest periods taken by sales associates who earned a commission instead of the guaranteed minimum. * * * *

For sales associates whose commissions did not exceed the minimum rate in a given week, the company clawed back (by deducting from future paychecks) wages advanced to compensate employees for hours worked, including rest periods. The advances or draws against future commissions were not compensation for rest periods because they were not compensation at all. At best they were interest-free loans. Stoneledge cites no authority for the proposition that a loan for time spent resting is compensation for a rest period. To the contrary, taking back money paid to the employee effectively reduces either rest period compensation or the contractual commission rate, both of which violate California law.

Thus, when Stoneledge paid an employee only a commission, that commission did not account for rest periods. When Stoneledge compensated an employee on an hourly basis (including for rest periods), the company took back that compensation in later pay periods. In neither situation was the employee separately compensated for rest periods.

This is bad news. What’s worse is that the same rationale can be applied to “non-selling” time such as training or meetings. That is, a draw against commission plan, under which the draw is fully recoverable as an advance, does not “pay” employees for hours not spent engaged in sales. The court focused on rest periods, but alluded to non-selling time in its opinion.  

So what’s an employer to do?  Here are two ideas – 

  1. Eliminate “recoverable” draw / advances against commission.  By paying a non-recoverable hourly figure of at least minimum wage, the above problem does not arise. Naturally, the commission rate can be reduced because of the increased “base” pay. 
  2. Pay separate amounts for rest periods and non-selling time.  That of course will lead to payroll headaches. But the courts and California legislature do not care about your headaches. Only Greggy does.

I’m sorry my first blog post for SLG is such a downer. But it’s better that you know and do something about it, before the class action waves hit the shore. 

This case is Vaquero v. Stoneledge Furn.  and the opinion is here. 

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