California protects employee working conditions in the state through a broad set of laws, rules and regulations. California employers must pay their employees a minimum hourly wage and one-and-a-half times the minimum wage for overtime work of more than 8 hours in a day or more than 40 hours in a workweek.
Certain exceptions apply to California’s overtime pay rules, however. One important exception is for employees who are paid a commission. This exception is spelled out in two different wage orders issued by the Industrial Welfare Commission. Wage Order No. 4 (which applies to professional, technical and officer employees in certain industries) and Wage Order No. 7 (which applies to retail employees) exempt commissioned employees from the overtime rules when two conditions are met:
- an employee’s earnings must exceed one-and-a-half times the minimum wage; and
- more than half of the employee’s earnings must come from commissions.
The California Supreme Court recently issued a decision interpreting this exception in a limited fashion favorable to employees. In Peabody v. Time Warner Cable, Inc., Peabody filed a class action lawsuit against Time Warner claiming violations of California’s overtime pay law. Peabody had been employed by Time Warner as an account executive and was responsible for selling advertising time on Time Warner’s cable channels. She and the other account executives were paid a base salary of $20,000 per year, plus commissions on advertising time sold. Under Time Warner’s policy, commissions were earned only after (1) the customer ordered the advertisement to run on one of Time Warner’s cable channels; (2) the advertisement ran; and (3) the customer paid for the advertisement.
For a 40-hour work week, the $20,000 base pay resulted in an hourly wage of $9.61 and bi-weekly pay of $769.23. Peabody claimed, and Time Warner did not dispute, that in most weeks, she worked 45 or more hours, but was not paid overtime. Time Warner claimed that Peabody and the other account executives were exempt from overtime under the commissioned-employee exemption.
The dispute turned on the method used by Time Warner to calculate and pay commissions. For example, when an account executive earned commissions in October, Time Warner would pay those commissions in one of the two semi-monthly paychecks in November. As a result, for many weeks in which Peabody worked overtime, she still received only her bi-weekly base pay of $769.23.
Time Warner argued that it should be allowed to “apportion” some of Peabody’s commissions over the month in which the commissions were earned, so that for the month, her pay exceeded $12 per hour, or one-and-a-half times the minimum wage.
The Court rejected Time Warner’s argument, on several grounds. First, the Court held that if an employee earns commissions over the course of a month, she must be paid those commissions in the pay period they were earned. California mandates at least two pay periods each month. Thus, Time Warner’s practice of paying earned commissions the following month, and in only one of the two required semi-monthly paychecks, violated California law.
Second, the Court ruled that the commission exception to California’s overtime law only applied when an employee’s earnings in each pay period exceed one-and-a-half times the minimum wage. “An employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall,” wrote the Court. Indeed, the Court adopted the position urged by California’s Labor Commissioner that, for the commission exemption to apply, the employee must be paid at least one-and-a-half times the minimum wage for each work week.
The Court also noted that Time Warner’s practice didn’t comply with California’s pay-stub rules, which require employers to provide pay stubs that list the gross and net wages earned in the applicable pay period.
If you are paid fully or partially on commission, read your pay stubs carefully to ensure that you are receiving your commissions in the pay period in which they are earned. If you work more than 8 hours per day or 40 hours per week, you have the right to overtime pay unless the commission-employee exemption — as interpreted by the California Supreme Court — applies.