Wages Based On Sales “Points” Are Not Commissions; Employer May Not Later Deduct “Points”

In Harris v. Investor’s Business Daily (— Cal. Rptr.3d —, 2006 WL 786806, Cal. App. 2 Dist., Mar. 29, 2006), a California Court of Appeal considered various aspects of a payment system used by a newspaper to compensate employees selling subscriptions by telephone.

The Court found that the system, which paid the employees based on points they earned for meeting various sales goals, did not fit the legal description of a commission, and therefore was not exempt from California overtime laws. Additionally, the deduction of employees’ points when subscriptions were cancelled may have violated labor laws that prohibit employers from taking back previously paid wages. It also found that federal labor law “opt-in” requirements in class actions do not pre-empt state laws with “opt-out” provisions.

Facts

Toby Harris and other employees (“Plaintiffs”) of Investor’s Business Daily (“Employer”) worked as telemarketers selling subscriptions to the paper. They were compensated according to points they accumulated by meeting various sales goals. Additionally, points were deducted, and their pay reduced accordingly, if a subscriber cancelled a subscription within 16 weeks.

In 2002, the Plaintiffs filed a class action lawsuit against Employer, alleging failure to pay overtime and unlawful payment deductions. The trial court granted summary judgment for Employer, finding that the Federal Labor Standards Act (FLSA) applied, and pre-empted state class action law because it required class members to “opt in” to the suit. It also found that the point system was the same as a commission and therefore not subject to overtime requirements and the deductions of points were a lawful recovery of an advance not ultimately earned. Plaintiffs appealed.

Decision

The Court identified three issues to be resolved in the case: 1) whether the FLSA pre-empted relevant state law; 2) whether the point-based payment plan was in fact a commission; and 3) whether the deductions for cancelled subscriptions were lawful.

First, the Court found that the predominant case law did not support the finding that the FLSA pre-empts class actions brought under state law. It then found that the trial court erred in granting summary judgment on the other claims.

The point system of payment is not a commission, the Court ruled, and therefore it is not exempt from state overtime laws. It cited Ramirez v. Yosemite Water Company (1999 Daily Journal D.A.R. 6065, Cal., June 17, 1999), in which the California Supreme Court defined a commission as “a percent of the price of the product or service.” In this case, the points were not tied to the price of a subscription. Therefore, a triable issue of fact remained on the overtime issue, and the trial court’s decision was reversed.

The Court then reviewed Labor Code Section 221, which prohibits employers from taking back wages previously paid to employees, and found the deduction for cancelled subscriptions may have violated it. Employer’s policy suggested that points were earned at the time of the sale, not at some future point, the Court noted. Therefore, deducting them may run afoul of Section 221, and a triable issue of fact remains. Again, the trial court’s decision was reversed.

The judgments were vacated and the case remanded to the trial court.

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