California Employers May Not Allocate Commissions Paid In One Pay Period To Different Pay Periods To Satisfy California Wage And Hour Laws

The California Supreme Court recently considered whether an employer may allocate an employee's commission wages from one pay period to other pay periods in order to meet the commissioned employee overtime exemption.  (Susan J. Peabody v. Time Warner Cable, Inc. (— P.3d —, 2014 WL 3397770, Cal. July 14, 2014)).  The Supreme Court held 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.  The minimum earnings requirement is not met by reassigning wages earned on a commission basis to a different pay period.


Susan Peabody was a Time Warner account executive selling advertising on Time Warner's cable channels.  Peabody earned a bi-weekly salary of $769.23 ($9.61/hour).  Approximately every other pay period, nearly monthly, she was also paid her commission under Time Warner's account executive compensation plan. Peabody filed suit alleging that she regularly worked 45 or more hours per week, but never received overtime wages for those excess hours worked. 

Time Warner insisted that Peabody fell within California's "commissioned employee" exemption and was therefore not entitled to overtime compensation.  The commissioned employee exemption, in part, requires that an employee's earnings exceed one and one-half times the current minimum wage (i.e., $12.00/hour).  Time Warner utilized a monthly pay period for commissions and bi-weekly payments for regular wages.  As a result, many of Peabody's bi-weekly paychecks only included her hourly wages ($9.61/hour) and did not consistently reflect her commissions, making her earnings frequently less than the minimum earnings needed to qualify for the commissioned employee exemption. 

To overcome this shortfall, Time Warner argued that Peabody's commissions should be attributed to the pay period in which they were earned, not just when they were paid.  For example, according to Time Warner, they should have been permitted to attribute commissions paid in November to an employee's October wages if the conditions for the commission were fulfilled in October.  Furthermore, Time Warner argued that paying commissions on a monthly time table would make up for any shortfall in an employee's bi-weekly earnings.  If Time Warner's view was accepted, then Peabody's monthly commissions on top of her bi-weekly wages would have been sufficient to bring her overall wages above the $12.00/hour minimum for the commissioned employee exemption.


The California Supreme Court disagreed. It found that under California law, absent certain express exemptions under Cal. Lab. Code § 204, all wages earned, including commissions, must be paid semi-monthly.  Moreover, the Supreme Court found that the minimum earnings for the commissioned employee exemption could not be met by attributing wages paid in one period to any prior pay period.  The minimum earnings prong, therefore, is concerned with when the commissioned wages were actually paid, not when they were earned. 

It is worth noting that Time Warner argued that its wage attribution plan could be acceptable under federal wage and hour laws and urged the California Supreme Court to follow the federal example.  The Supreme Court rejected Time Warner's reliance on federal law due to the substantial differences between the federal and state requirements.  This serves as a reminder to employers to be mindful of the variances between federal and state wage and hour laws.  


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