California’s Labor Code and wage orders require employers to “authorize and permit” employees to take periodic, paid rest periods. These requirements equally apply to all employees, unless employees are designated “exempt” under the executive, administrative, professional, outside sales, or other exemptions. Applying that principle, the California Court of Appeal recently decided that non-exempt sales employees paid on commission are entitled to paid rest periods. Payment of “draws against commissions” (that is, “recoverable” draws) and commission payments are not adequate compensation for paid rest periods. California employers therefore should review their commission-based compensation plans promptly.
Stoneledge Furniture, LLC paid its sales associates a commission based on a percentage of sales. The company’s commission agreement explained that sales associates would receive at least $12.01 per hour for every hour worked. If a sales associate failed to earn the equivalent of at least $12.01 per hour in commissions during a pay period, Stoneledge considered the hourly pay a “draw” or advance against future, earned commissions. Once an employee earned commissions, the company paid the employees the net difference between the earned commissions and previously advanced draw. Stoneledge did not separately compensate sales associates for rest periods or any other non-selling time, such as participating in training or attending meetings.
The sales associates filed a class action complaint alleging Stoneledge’s compensation plan violated California law. Stoneledge argued that it paid sales associates a guaranteed minimum for all hours worked, which included rest periods. But the court in its opinion in Vaquero v. Stoneledge Furniture, LLC disagreed.
California law requires employers to pay for “all hours worked,” and rest breaks are counted as “hours worked for which there shall be no deduction from wages.” The court decided that, although the draw was in the form of an hourly rate to ensure compliance with minimum wage laws, the draw itself really was a pre-paid commission. The court noted the draws “were not compensation for rest periods because they were not compensation at all.” The court characterized the draws as “interest-free loans” because Stoneledge “clawed back” the advanced commissions in future paychecks.
The court analogized commission plans to piece-rate plans, under which employees are paid a fixed rate for each unit produced or action performed, regardless of the time it takes to complete the action. In Bluford v. Safeway Stores, Inc., a 2013 decision, the court held that employers who use an “activity-based compensation system,” such as a piece-rate plan, must separately compensate employees for rest periods because employees paid by the piece cannot earn these payments during rest breaks, when no work is performed.
Applying this rationale, the court in the Stoneledge case reasoned that the commission (and draw) compensated employees for selling, not for taking breaks. Therefore, it was unlawful to designate a portion of a commission as rest break compensation. Pure commission-based compensation plans must include separate compensation for rest periods.
Of significance, the court further extended its rule to other forms of non-selling work, such as training and meeting time. After all, training and meetings are hours worked, but the employees cannot earn commissions while participating in them. As a result, a “commission” for a sale cannot “finance” training or meeting time.
Draw-against-commission compensation plans remain legal. However, commission plans must now “separately account and pay for rest periods” and other non-selling time. Employers may choose from several legally compliant options. Here are two:
- Retain a system that provides a “recoverable draw” against future commissions, but pay separate amounts for rest breaks and other non-productive time at an hourly rate of at least minimum wage.
- Replace the “recoverable draw” system with a system that pays a “non-recoverable,” base hourly rate of at least minimum wage, plus commission. Employers, of course, may set a lower commission rate to compensate for the higher base pay. Employers will have to decide how to handle those employees who do not make sufficient sales to justify the base pay.
Changing compensation systems may implicate other legal issues. For example, employers should give adequate, prospective notice of changes and comply with existing agreements. Commission plans in California also must be in writing and signed by the employee. Additionally, employers changing non-exempt employees’ compensation plans must comply with the Wage Theft Prevention Act. Changes may also require modifications to timekeeping practices and itemized wage statements. Employers should consult with legal counsel when reviewing and revising your commission-based compensation plans and related practices to help prevent costly violations of California’s many wage-hour laws.