What Tasks May Be Compensated By Commissions In California?

Commission is one of several types of wage expressly recognized under California Labor Code (LC) § 200[1]. Commission pay plans can benefit both employees and employers. The chance to earn commissions provides salespeople with an incentive to work at the top of their game and receive economic benefits directly tied to successful performance.  It gives employers an imminently fair method of rewarding a salesperson for his or her effort and skill.  And it is based on a simple, universally familiar concept–a salesperson sells an item and receives a percentage of the selling price.  Yet the law surrounding this form of pay is surprisingly complex.  Commission pay schemes can conceal traps for the unwary, which may result in employee exploitation or employer liability.

The first step in avoiding such pitfalls is to realize that California law strictly limits the type of work that may lawfully be compensated through commission pay.  LC § 204.1 defines commission as follows:  “Commission wages are compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof[2].” By its plain language, the statute identifies two essential elements that must be present for the lawful use of commission wages.  This article focuses on the application of these elements to analyze what tasks, performed by non-exempt salespersons,[3] may legally be compensated by commission pay under California law[4].

This issue is often far less straightforward than it may initially appear when applied to the everyday reality of the workplace.  Many, if not most sales workers are routinely required to perform non-selling tasks in additions to the sales work that generates commissions.  Consider, for example, a retail worker paid solely by commissions earned from the sale of appliances.  The worker may be required to arrive 30 minutes before the store opens to set up a cash register and hang sale signs. After opening, he or she must set up displays, restock merchandise, take inventory, clean fingerprints off floor models, and dispose of trash—in addition to selling merchandise.

This creates a dilemma for employers, because non-exempt employees must earn at least minimum wage for all time spent subject to the control of their employer under LC § 204 (requiring that all wages earned and due for each hour worked be timely paid), LC § 1171 et. seq. (governing minimum wages) and other law, as explained in Morillion v. Royal Packing Co.[5] Unless such workers are paid an hourly base of at least minimum wage in addition to their commission earnings (and many are not), a question arises as to how they are compensated for time spent on work that is not selling, and therefore not lawfully compensable by commission pay?  And how do they receive their mandatory paid rest breaks?[6]

California law provides little guidance on this issue; yet two clear rules have emerged, which combine to prohibit employers from applying commissions earned on sales to compensate employees for time spent on non-selling tasks. First, commission wages may only be paid for work that satisfies the two-prong test of LC § 204.1; and second, employers are not permitted to “average” commission earnings to meet their obligation to pay at least minimum wage for time spent on tasks that do not satisfy both prongs of the test.[7]  Thus, sales workers paid by commissions, who also perform non-selling tasks, must be paid a separate wage for such tasks.

This article does not attempt to list what tasks do or do not satisfy the test (beyond those that have been specifically addressed California’s higher courts), but rather to summarize the existing law to aid the worker, employer, or practitioner in making this analysis. The Labor Code, plus the few cases on point, have established a sound framework to aid in the process.

The Two-Prong Test That Determines Whether Commission May Legally Be Paid for a Particular Task 

Two California cases have helped refine the test set forth in LC § 204.1.  Keyes Motors, Inc. v. DLSE[8]  involved auto mechanics who purportedly received a “commission” for each car they serviced, based on the hourly rate charged to the customer. After the DLSE determined that Keyes owed the mechanics back pay for overtime work, Keyes sought a judicial determination that the mechanics were exempt from overtime requirements.[9] Adopting the DLSE’s finding that commissions are earned only by those participating in direct sales to the customer, the court concluded that LC § 204.1 “…sets up two requirements, both of which must be met before a compensation scheme is deemed to constitute ‘commission wages:’  First, the employees must be involved principally in selling a product or service, not making the product or rendering the service.  Second, the amount of their compensation must be a percent of the price of the product or service.” [10]   The court concluded that the mechanics were misclassified as commission workers, because “Mechanics are engaged in rendering a service, not selling it…Put simply, a mechanic performs labor, not sales.”[11]  Thus, the plaintiffs could not be paid under a commission scheme or classified as exempt[12].

This two-prong test was adopted and applied by the California Supreme Court in Ramirez v. Yosemite Water Co.[13] (the “Ramirez test”).  That case was brought by a delivery route driver who had been classified by the defendant bottled water company as both an outside salesperson and a commissioned salesperson, allegedly exempt from the Labor Code’s overtime provisions[14]. However, he spent a significant part of each workday on non-selling activities, including delivering water and picking up empty bottles.  The defendant argued that these were “sales activities,” reasoning that Mr. Ramirez would lose customers if they were not performed.  The Court disagreed, explaining:

Delivery of preordered water bottles or the restocking of “empties” is not a sales activity in the conventional meaning of the word–one who only performed these delivery tasks could not be considered a salesperson. It is true, as Yosemite points out, that failure to properly deliver the product would lead to loss of the customer, but that does not make such delivery a sales activity, any more than an attorney’s preparation of a legal brief in order to satisfy and thereby retain a client is a sales activity.[15]

The Ramirez court thus clarified that commissions cannot be used to pay employees for any work other than sales activities that meet the two-prong test articulated in Keyes.[16] Ramirez was remanded to allow the trial court to determine which of the plaintiff’s activities constituted  “sales related” tasks, and which did not; an analysis that went to both of the alleged classifications.[17]

Subsequent cases from California’s higher courts, as well as federal courts applying California law, have reaffirmed the two-prong Ramirez test in varying factual contexts, and recognized that a lawful commission wage must meet both of its elements.[18]  Unfortunately for practitioners grappling with the question presented here, however, such cases have added little to California jurisprudence addressing what specific tasks pass muster.  Thus, while Keyes held that performing mechanical/repair services is not a commissionable task, and Ramirez established that stocking does not satisfy the standard, other tasks must be analyzed on a case-by-case basis. This process can be daunting, yet it must be done when employers choose to pay sales workers by commission pay alone (or under another system that does not provide a base wage of at least minimum).

The First Prong:  Is a Task a “Selling” or “Non-Selling” Task?

The initial step in the analysis is easily applied to some tasks—such as the repair work performed by the mechanics in Keyes. Not only did such work not involve selling, the court also found it significant that the mechanics had no direct contact with customers.[19] The author submits that any tasks performed out of the presence of potential customers, or where there is no customer contact—for example, taking inventory in a stockroom—should be deemed “non-selling.” However, for other tasks, the call is not so clear, especially when non-selling tasks are done while customers are present (such as counting items on the sales floor).  Arguably, however, all activities other than selling a product or service, whether done in the presence of customers or not, fail Ramirez test and contravene the plain language of LC § 204.1.

Difficulty also arises when employers try to stretch the definition of “sales related activities” to encompass tasks they claim “support” a sale or create an environment conducive to sales, as did the defendant in Ramirez.  Indeed, one could logically argue that any activity that makes a product or service more desirable or available to a customer could constitute a service rendered in the sale.  This could be extended to absurd lengths, for example, to a claim that replacing light bulbs in a store’s sign helps customers locate the store.

But where should the line be drawn?  The Ramirez court suggested looking at the task on its own, outside the facts presented—observing that a worker who performed only delivery work could not be considered a salesperson.  Such a test works well in some contexts.  Returning to the retail appliance salesperson, the employer might argue that cleaning fingerprints off a model refrigerator impacts the customer’s perception of the product, and thus the likelihood of making a sale.  Yet such work clearly could not, on its own, pass the Ramirez test—and the fact that most stores hire a cleaning crew to handle that type of work is also a significant factor in this analysis.

However, the circumstances in which a task is done can change its character, so that it may or may not satisfy the first prong, depending on when or how it is performed.  For example, a confectionary salesperson who gift-wraps a box of candy for a waiting customer is surely performing a “service rendered in the sale.”  But what if the same employee uses time when no customers are in the store to gift-wrap boxes for a “grab and go” display—boxes that may be sold by a different salesperson?  Such tasks can consume a great deal of time without generating a sale for the worker who performs them—so can they realistically be deemed “selling” tasks that satisfy the first prong of the test?  Moreover, even if they could, the second prong of the test is clearly not met.

The Second Prong:  Commission Compensation Must Be a Percent of the Price of a Specific Sale

Determining whether the second prong of the Ramirez test is satisfied is usually easier.  Where no sale is made, nothing exists from which a “percentage of the sale” can be calculated as commission pay.  Additionally, each sale that generates a commission is usually tracked by an identifying record such as an SKU number, which is shown on a paystub or other itemized record.  Thus, each increment of commission compensation is tied to the specific sale of a specific product or service, such as a computer (one commission) and a three year service contract for repairs to the computer (another commission).

However, this analysis can also be troublesome within the context of real-life circumstances.  Salespeople working in stores that sell both commission-generating goods and items that do not carry a commission may be required to sell both.  Part of this work fails to pass muster under the second prong of the test—yet it may be inextricably intertwined with work that is compensable by commission pay.

Likewise, how are employees compensated for sales efforts (which satisfy the first prong) that do not result in a sale (and therefore fail the second prong)? By the plain language of the Ramirez test, there can be no pay that is “based proportionately upon the amount” of a sale when no sale is completed.  Yet sales workers, especially those that sell big-ticket items, routinely invest countless hours working with non-buying customers before a single sale is made.  Commissions earned when sales efforts do succeed have traditionally been presumed to compensate the worker for such time, and the author has found no California case law directly challenging this entrenched assumption[20]. Yet this creates a dilemma under the plain meaning of the second prong, as well as illustrating an additional rule of law governing commission compensation:  Even if unsuccessful sales efforts could be deemed to satisfy the Ramirez test, the hours expended on such work would necessarily be paid through wage averaging—which is not permitted under California law.

Wages Specific to One Type of Work Cannot Be “Averaged”  to Compensate Employees for Time Spent on Other Work

Employers often argue that earnings should be viewed within the context of a full pay period, to determine whether the amount paid equals a sum sufficient to average at least minimum wage for all hours worked. While such an argument might hold water under the FLSA,[21]  at least one California appellate case has expressly rejected such averaging of wages as contrary to California law.  Armenta v. Osmose[22] held that an employer who used an averaging method to determine employees’ hourly wages violated the state minimum wage law and other Labor Code provisions. The Armenta plaintiffs worked for a company that maintained poles for utility companies.  Employees’ time was classified as either “productive” (directly related to maintaining the poles), or “nonproductive” (tasks like travel time, safety meetings, loading vehicles, completing paperwork, and maintaining the vehicles). Employees were only paid for “productive” time, but the employer argued that this was lawful since the total amount paid averaged out to an hourly wage that exceeded the state minimum wage.[23]

The court rejected this theory. It emphasized that “…all hours must be paid at the statutory or agreed rate and no part of this rate may be used as a credit against a minimum wage obligation.”  Thus, the employer violated the minimum wage law and other Labor Code provisions by “averaging” wages specific to one type of work to fulfill its obligation to pay minimum wages for hours spent on “non-productive work.” This is directly analogous to averaging commission wages, which may only be paid for selling work that satisfies the Ramirez test, to pay for hours spent on “non-selling” work. [24]

Significantly, Armenta has been recognized and reaffirmed in subsequent California and federal decisions—and this authority makes it clear that Armenta’s holding is not limited to the facts of that case, but also applies to pay plans different from, but comparable to, the “productive” versus “non-productive” dichotomy at issue there.[25]  Armenta provided the basis for Federal District Court’s holding in Ontiveros v. Zamora,[26] which involved auto mechanics paid on a “per job” pay plan, similar to a piece rate system.  The plaintiffs alleged that this payment system violated California labor laws because it failed to compensate employees for time spent on other required activities, including meetings and training sessions, setting up work stations, and taking state-mandated breaks. Rejecting the defendant’s claim that the pay system was lawful as long as the average hourly compensation did not fall below minimum wage, the court found that because essential tasks were not compensated, the pay scheme violated the minimum wage laws.[27]

The Ontiveros court also expressly rejected the employer’s argument that Armenta’s holding should be limited the specific facts of that case.  It explained, “Here, plaintiff alleges that defendants utilized a compensation scheme that possessed the same central characteristics which the Armenta court rejected, in that employees are not necessarily compensated for every hour worked and an employee is compensated for non-piece rate hours with wages accrued during piece hours.”[28]  The same exact analysis applies in the realm of commission compensation:  California employers cannot average commissions earned by employees while selling to satisfy their obligation to pay at least minimum wage for time spent on non-selling tasks.

Solutions:  What Are Employers’ Options When Sales Workers Must Also Perform Non-Selling Tasks?

The rules of law discussed above therefore make it clear that California sales employees must be paid at least minimum wage by a method of payment other than commissions for each hour spent performing non-selling tasks. Several options are open to employers who wish to compensate sales workers primarily through commissions earned on sales, but also require them to perform non-selling tasks.

The Simplest Solution:  Pay a Base Wage of At Least Minimum

The easiest answer to this dilemma is to simply pay sales workers a base of at least minimum wage in addition to commissions, as illustrated by Steinhebel v. Los Angeles Times[29].  In Steinhebel, subscription sellers challenged the employer’s policy of “charging back” commissions when a buyer cancelled the subscription before a set time had passed, claiming that this resulted in uncompensated work.  The court explained that non-exempt employees must be paid for all of their time spent under the employer’s control per Morillion, but also observed that the sellers were paid minimum wage as a base, in additions to commissions earned.  Thus, when commissions did not compensate them for their time, “…the minimum hourly wage serves as his or her compensation for time spent.”[30]

Hiring Hourly Workers to Perform Non-Selling Tasks

Employers may also hire other workers to perform non-selling tasks, so that salespersons can devote all their time selling.  This method is commonly used in retail settings, where workers paid an hourly wage handle such tasks as cleaning, display, and stocking.  Realistically, however, non-selling work may also be required when these workers are not present (for example, cleaning up a customer’s spill when the housekeeping staff is off duty).  Additionally, some sales jobs include tasks that can only be performed by the salesperson (such as compiling and transmitting sales records at the end of each day).  Thus, hiring others to do all of the non-selling tasks required may be unrealistic.

Apportioning Tasks:  Essential For Commission-Only Pay Schemes

This leaves one other option:  A compensation plan that pays commissions for work that satisfies the Ramirez test, while paying for other work by another method.  In Sav-On Drug Stores, Inc. v. Superior Court[31]  the California Supreme Court outlined a three-step process of task classification, by which either employers or courts can determine whether employees are properly classified and paid:  (1) Identify and classify the type of task performed; (2) Know what tasks employees perform throughout the work day; and (3) Pay them properly.  As explained in Ramirez, the analysis should focus on the realistic requirements of the job:  “…the court should consider, first and foremost, how the employee actually spends his or her time.”[32]  Then the tasks can be categorized as selling or non-selling, and a method of recording time and properly paying for each can be implemented.

This process may be used in either individual or class-action cases, since it is based on job requirements and actual tasks performed by workers in identified positions, rather than individual expectations or deviations. As stated in Ramirez, “On remand, the trial court should… itemize the types of activities that it considers to be sales related, and the approximate average times that it finds the employee spent on each of these activities.”[33]

Other Legal Issues That May Arise in Commission Compensation Systems

A number of related issues often arise where an employer chooses to compensate sales workers through a commission-only pay system.  While these issues are beyond the scope of this article, they should be briefly noted as worthy of further consideration by both employees challenging a commission-pay scheme and employers hoping to avoid such challenges:

  • Timely payment of wages earned and due: Some commission plans purportedly satisfy the employers’ minimum wage obligations by advancing money sufficient to pay minimum wage for all hours worked, during periods when commissions earned do not meet this amount.  The employer then takes back the sum advanced during the next pay period in which the employee earns sufficient commissions to cover minimum wages for that pay period and reimburse the employer for the previous advance.  While often called a “draw,” such schemes do not involve a true draw, which by definition is an advance against commissions (or other wages) not yet earned, rather than money paid to cover wages already owed.  Thus, in addition to violating the prohibition against averaging, such schemes may run afoul of LC § 204, because workers are not paid all commissions earned and due (which are instead applied to fulfill the employer’s minimum wage obligations).
  • Illegal Deductions: LC §§ 221 (and other California law) strictly limits the type of deductions employers can take from wages earned.  Thus, whenever a portion of commissions earned are deducted or withheld for unauthorized purposes—including to pay minimum wages for time spent on non-selling work—an illegal deduction occurs.  In Armenta, the court found such a violation through the defendants’ averaging scheme, where a portion of the employee’s wage per “productive” hour was effectively withheld and used as compensation for the “non-productive” hours.[34]
  • Unlawful Reduction of Pay Rates: “Draw” or other averaging schemes may also contravene LC § 223, which bars employers from secretly paying a lower wage than that set by statute or contract, as found in Armenta.”[35]
  • Returns: Employers often deduct or “chargeback” commissions previously paid when goods are returned, or service contracts cancelled by the customer.  While such policies may be lawful where employees have consented in writing and the return/cancellation can be tied to a specific sale by an identified salesperson, questions remain as to how the employee is compensated for time originally spent selling the item, as well as time spent processing the return.[36]
  • Written Contracts: Like other contracts, employment agreements cannot abrogate the law (for example, by providing that commission earnings will pay for time spent on tasks that do not pass the Ramirez test). Additionally, an employer’s failure to pay wages in accordance with the terms of an express or implied contract may support a breach of contract claim.  Documents such as posted commission rates and employee handbook provisions, may create contractual obligations that are breached when commissions are not lawfully paid (i.e. expected to cover time spent on non-selling work)[37].
  • Fraud: Where an employer makes promises that are subsequently not kept, or where material terms of employment are misrepresented or concealed, employees may be able to assert fraud or misrepresentation claims[38].
  • Paystub violations: where commission earnings are not properly reflected or applied, a violation of LC §§ 226 (failure to provide an accurate itemized wage statement) may also arise.
  • Unlawful employment policies and practices may constitute unfair business practices under Bus. & Prof. Code § 17200[39].
  • Penalties: Employers found liable for Labor Code violations may also be assessed penalties under various Labor Code provisions.  PAGA penalties under LC §§ 2698-2699 may be recovered in addition to any other statutory penalties or damages awarded.
  • Declaratory/injunctive relief: Employers may be ordered to cease illegal labor practices through a declaratory judgment or injunction, particularly within the class action context.

CONCLUSION

Commission compensation is a legally sanctioned pay system that may be highly desirable to both employers and employees, when lawfully structured and applied.  However, it can also be treacherous for those unaware of its legal limits.  Employers who pay commissions must be aware of the rules of California law establishing that commissions earned by employees while selling cannot be applied to compensate the employee for any time spent on non-selling tasks because (1) labor not falling within the LC § 204.1 definition, as applied through the Ramirez two-prong test cannot, by operation of law, be compensated by commission earnings; and (2) employers are not permitted to “average” commission wages which are legally restricted to one type of work, to satisfy their distinct obligation to pay minimum wages for hours spent on non-selling tasks.  Thus, unless the employer pays a base wage of at least minimum for all hours work (clearly the easiest way to avoid running afoul of the applicable law), or hires workers paid by another method to do all non-selling work (which may be impractical); the employer must apportion the work done by its employees between sales work that satisfies the Ramirez test, and other work, which must be compensated in another manner.

[1] LC § 200 defines “wages” to include “…all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation.”

[2] While the language of LC § 204.1 references vehicle dealers, the California Supreme Court has clarified that its definition of “commission” also applies to other employers.  “Although section 204.1 applies specifically to employees of vehicle dealers…we agree that the statute’s definition of ‘commission’ is more generally applicable.” Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 803.

[3] LC § 1173 charges the California Industrial Welfare Commission (IWC) with implementing the Code’s provisions on wages, hours and working conditions through orders codified in the California Code of Regulations. The DLSE is then authorized to administer, interpret, and enforce IWC orders (LC §§ 61, 1193.5), although final responsibility for the interpretation of statutes and regulations rests with the courts.  See Keyes, supra, 197 Cal. App. 3d at 5620563.  The interplay between these sources of law often arises in misclassification cases.  LC § 1171 exempts certain categories of workers, including some commission-earning employees, from California’s overtime laws (“exempt” employees).  Under Cal. Wage Order 4-2001(3)(D), “[t]he provisions of [overtime pay] shall not apply to any employee whose earnings exceed one and one-half (1 ½) times the minimum wage if more than half of that employee’s compensation represents commissions.”  This article discusses non-exempt sales employees, who must be paid at least minimum wage and overtime for all hours worked. However, sales worker misclassification cases challenging classification of the plaintiffs as “exempt” employees are exempt are directly applicable here, because an identical analysis of tasks performed is required in such cases.  As explained in Takacs v. A. G. Edwards & Sons (S. D. Cal. 2006) 444 F. Supp. 2d 1100, 1120, in order for a court to determine whether more than half of the employee’s compensation represents commissions, it must first determine if the wages are “commissioned wages” under the Ramirez test.

[4]  This article focuses on California law, since the state law governing the issues discussed is more protective of employee rights than federal law.  Accordingly, California law, rather than the FLSA, primarily impacts this analysis (although significant differences are noted). See Ramirez, supra, 20 Cal.4th at 795 (“…state law may provide employees greater protection than the FLSA”); Armenta v. Osmose (2005) 135 Cal. App. 4th 314, 322-324 (“Although federal wage law can serve as persuasive authority, it is not relevant when the federal law addressed is less protective of employees’ rights than the California law… A review of our labor statutes reveals a clear legislative intent to protect the minimum wage rights of California employees to a greater extent than federally”).

[5] (2000) 22 Cal. 4th 575, 587-588.  One exception to this rule is recognized:  Employers will not be held liable for failure to compensate workers for de minimus increments of time.  Thus, where a sales worker spends only de minimis time on non-selling tasks, a commission-only pay scheme may be lawful.  While there is no established definition of this term, most courts have found “…daily periods of approximately 10 minutes de minimis although otherwise compensable.” See Lindow v. United States, 738 F.2d 1057, 1062-1063 (9th Cir. 1984) (cited favorably in DLSE Manual §47.2.1 (2009); and followed in Gomez v. Lincare, Inc. (2009) 173 Cal. App. 4th 508, 526).  However, caution should be exercised in presuming any increment of work falls within this exception.  As stated in Rutti v. Lojack Corp. (9th Cir. 2010) 596 F.3d 1046, 1059 “…unless the amount of time approaches…’split-second absurdities,’ the [employee] should be compensated.”

[6] Under California law, workers must be provided paid rest breaks after working at least four hours, and may not do any work during this time.  See Murphy v. Kenneth Cole Productions, Inc, (2007) 40 Cal. 4th 1094, 1104; LC § 226.7.  Obviously, salespersons are not selling or earning commission while on break, so unless they are paid a separate wage to cover break time, they are not receiving paid rest breaks.

[7] Commission pay is usually (though not always) subject to a written contract between the employer and employee.  While the specific terms of payment (such as commission rates, when commissions are deemed earned, and return policies) may be governed by contract; provisions will not be enforced that are illegal, unconscionable, contrary to public policy, or otherwise undermine or abridge statutory rights.  See LC § 219 (providing that “…no provision of this article can in any way be contravened or set aside by a private agreement, whether written, oral, or implied”); Civil Code § 3513 (“…a law established for a public reason cannot be contravened by a private agreement”); Hudgins v. Neiman Marcus Group, Inc. (1995) 34 Cal. App. 4th 1109, 1124 (defendant could not use an employment agreement by which it required its employees to consent to unlawful deductions from their wages). See also Koehl v. Verio, Inc. (2006) 142 Cal.App.4th 1313, 1330; Nein v. HostPro, Inc. (2009) 174 Cal. App. 4th 833, 853; Nordstrom Commission Cases (2010) 186 Cal. App. 4th 576, 584-585; and Steinhebel v. Los Angeles Times Communications, LLC (2005) 126 Cal.App.4th 696, 705.

[8] (1987) 197 Cal. App. 3d 557, 563-564.

[9] Virtually all reported cases in California and California’s federal jurisdictions addressing commission compensation are brought as misclassification cases, challenging an employer’s classification of sales employees as exempt under LC § 1171 and the IWC orders applying its provisions.  However, as noted above, such cases require a parallel Ramirez analysis of tasks performed as exempt (selling) or non-exempt (non-selling) tasks, so their holdings on these points apply directly to the question at issue here.

[10] Keyes, supra, 197 Cal. App. 3d at 564.

[11]  Id.

[12] Keyes clarified that commissions cannot be paid for either making the goods, or performing the services sold—commissions only pay for selling goods or services.  Id, see also Ramirez, supra, 20 Cal. 4th at 804 (the employee’s sales duties must not include “making the product or rendering the service” if the test is to be satisfied). This distinction may be significant in certain factual contexts, such as when a salesperson also performs the service sold or a retail employer argues that assembling a floor model is a “service rendered in the sale.”

[13] Id at 803–804

[14]  Id at pp. 803, discussing the Commissioned Employee exception and citing Wage Order No. 7-80(3)(e) and its successor, Wage Order No. 7-89(3)(B) [now Wage Order 4-2001(3)(D)], which state that “[p]rovisions of [overtime compensation] shall not apply to any employee whose earnings exceed one and one-half (1 ½) times the  minimum wage, if more than half (1/2) of that employee’s compensation represents commissions.”

[15] Id at 802.

[16] Id at 803.

[17] Id at 803-804.

[18] See Romero v. Producers Dairy Foods, Inc. (E. D. Cal. 2006) 235 F.R.D. 474, 487-488 (recognizing that both elements of the Ramirez test must be present for a compensation scheme to constitute commission wages); Lynne Wang v. Chinese Daily News, Inc. (C. D. Cal. 2006) 435 F. Supp. 2d 1042, 1062 (“…with regard to whether salespersons receive “commissions” as that word is meant under California law, the compensation scheme must meet two requirements…;” if salespersons receive pay based on the number or size of ads sold, rather than a percentage of the sale price, their pay is not commission); Harris v. Investor’s Business Daily (2006) 138 Cal. App. 4th 28, 37 (in Ramirez, “…the Supreme Court defined two essential requirements for finding that a compensation scheme involves commissions…”); Takacs, supra, 444 F. Supp. 2d 1100 (the Ramirez/Keyes requirements that must be met before a compensation scheme is deemed to constitute “commissioned wages”).

[19] Keyes, supra, 197 Cal. App. 3d at 562.

[20] The court alluded to this issue in Steinhebel, supra, 126 Cal. App. 4th 696, wherein it rejected a challenge brought by subscription salespersons to the defendant’s policy of “charging back” commissions on cancelled subscriptions because it found that the minimum wage base pay they received covered the time they spent selling the cancelled subscriptions.  This suggests that time spent on sales that prove unsuccessful in generating commissions must be compensated by another type of wage.

[21] Under the FSLA and other federal authority, employers may be permitted to average commission wages as long as the averaging period does not exceed a single workweek (or otherwise violate applicable law).  See Takacs, supra, 444 F. Supp. 2d at 1114, citing 29 CFR § 778.104.

[22] (2005) 135 Cal. App. 4th 314, 324.

[23] Id at 317-319.

            [24] The Armenta court did not address LC § 204, although the author submits that the plaintiff might also have alleged violation of this statute under the facts.  The court found that the employer’s averaging scheme violated LC § 221 (“It shall be unlawful for any employer to collect or receive from an employee any part of wages theretofore paid by said employer to said employee”), § 222 (dealing with collective bargaining agreements) and § 223 (“Where any statute or contract requires an employer to maintain the designated wage scale, it shall be unlawful to secretly pay a lower wage while purporting to pay the wage designated by statute or by contract”).

[25] The holding of Armenta is supported by a strong foundation of earlier case law, including cases demonstrating that the total sum an employee earns does not impact an analysis of whether he or she is properly paid under applicable law. In Kerr’s Catering v. DIR (1962) 57 Cal. 2d 319; Hudgins, supra, 34 Cal. App. 4th 1109; and Quillian v. Lion Oil Co. (1979) 96 Cal. App. 3d 156; the plaintiffs always received compensation that equaled or exceeded the minimum wage.  Yet in each case the court held that the defendant-employer’s actions violated the California Labor Code.

[26] (E. D. Cal. 2009) 2009 U.S. Dist. LEXIS 13073 at ¶¶ 8-10.

[27] Id at 14.

[28] Id at ¶¶ 10-11, quoting Armenta at 323. The Ontiveros court further rejected the defendant’s contention that Fitz-Gerald v. SkyWest Airlines, 155 Cal. App. 4th 411 (2007) showed narrowness in the Armenta holding, noting that the central issue SkyWest involved preemption of plaintiffs’ action for violation of state minimum wage laws under the Railway Labor Act, and the court expressly distinguished Armenta on the ground that it did not deal with preemption.  It explained, “Labor Code sections 221 and 222 prohibit an employer from paying an employee less than minimum  wage for each hour worked, whether through a wage agreement or not. The SkyWest court recognized this to be the basis for the Armenta court’s holding…”  Id at 12-13.

[29] (2005) 126 Cal. App. 4th 696

[30] Id at 708.

[31] (2004) 34 Cal. 4th 319, 330

[32] Ramirez, supra, 20 Cal. 4th at 802; see also Romero, supra, 235 F.R.D. at 488.  While a discussion of special concerns that may arise in the class action context are beyond the scope of this article, it should be noted that while employers may argue that an examination of each worker’s time and tasks is required, thus defeating commonality, the correct focus is on the objective requirements of a particular job.  See Sav-On, supra, 34 Cal. 4th at 337-388.

[33] 20 Cal. 4th  at 803 n. 5

[34] Armenta, supra, 135 Cal. App. 4th at 323

[35] Id.

[36]See Hudgins, supra, 34 Cal. App. 4th 1109;  Steinhebel, supra, 126 Cal. App. 4th at 705

[37] Failure to pay commissions as posted may also give rise to a violation of LC § 204.

[38] See Agnew v. Cameron (1967) 247 Cal. App. 2d 619, 624 (employer has a duty to make explicit the terms of employment, particularly in situations where the employer demands the return of previously transferred funds).

[39] A UCL violation was found in Hudgins, supra, 34 Cal. App. 4th at 1126-1127.

[1] LC § 200 defines “wages” to include “…all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation.”

[1] While the language of LC § 204.1 references vehicle dealers, the California Supreme Court has clarified that its definition of “commission” also applies to other employers.  “Although section 204.1 applies specifically to employees of vehicle dealers…we agree that the statute’s definition of ‘commission’ is more generally applicable.” Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 803.

[1] LC § 1173 charges the California Industrial Welfare Commission (IWC) with implementing the Code’s provisions on wages, hours and working conditions through orders codified in the California Code of Regulations. The DLSE is then authorized to administer, interpret, and enforce IWC orders (LC §§ 61, 1193.5), although final responsibility for the interpretation of statutes and regulations rests with the courts.  See Keyes, supra, 197 Cal. App. 3d at 5620563.  The interplay between these sources of law often arises in misclassification cases.  LC § 1171 exempts certain categories of workers, including some commission-earning employees, from California’s overtime laws (“exempt” employees).  Under Cal. Wage Order 4-2001(3)(D), “[t]he provisions of [overtime pay] shall not apply to any employee whose earnings exceed one and one-half (1 ½) times the minimum wage if more than half of that employee’s compensation represents commissions.”  This article discusses non-exempt sales employees, who must be paid at least minimum wage and overtime for all hours worked. However, sales worker misclassification cases challenging classification of the plaintiffs as “exempt” employees are exempt are directly applicable here, because an identical analysis of tasks performed is required in such cases.  As explained in Takacs v. A. G. Edwards & Sons (S. D. Cal. 2006) 444 F. Supp. 2d 1100, 1120, in order for a court to determine whether more than half of the employee’s compensation represents commissions, it must first determine if the wages are “commissioned wages” under the Ramirez test.

[1]  This article focuses on California law, since the state law governing the issues discussed is more protective of employee rights than federal law.  Accordingly, California law, rather than the FLSA, primarily impacts this analysis (although significant differences are noted). See Ramirez, supra, 20 Cal.4th at 795 (“…state law may provide employees greater protection than the FLSA”); Armenta v. Osmose (2005) 135 Cal. App. 4th 314, 322-324 (“Although federal wage law can serve as persuasive authority, it is not relevant when the federal law addressed is less protective of employees’ rights than the California law… A review of our labor statutes reveals a clear legislative intent to protect the minimum wage rights of California employees to a greater extent than federally”).

[1] (2000) 22 Cal. 4th 575, 587-588.  One exception to this rule is recognized:  Employers will not be held liable for failure to compensate workers for de minimus increments of time.  Thus, where a sales worker spends only de minimis time on non-selling tasks, a commission-only pay scheme may be lawful.  While there is no established definition of this term, most courts have found “…daily periods of approximately 10 minutes de minimis although otherwise compensable.” See Lindow v. United States, 738 F.2d 1057, 1062-1063 (9th Cir. 1984) (cited favorably in DLSE Manual §47.2.1 (2009); and followed in Gomez v. Lincare, Inc. (2009) 173 Cal. App. 4th 508, 526).  However, caution should be exercised in presuming any increment of work falls within this exception.  As stated in Rutti v. Lojack Corp. (9th Cir. 2010) 596 F.3d 1046, 1059 “…unless the amount of time approaches…’split-second absurdities,’ the [employee] should be compensated.”

[1] Under California law, workers must be provided paid rest breaks after working at least four hours, and may not do any work during this time.  See Murphy v. Kenneth Cole Productions, Inc, (2007) 40 Cal. 4th 1094, 1104; LC § 226.7.  Obviously, salespersons are not selling or earning commission while on break, so unless they are paid a separate wage to cover break time, they are not receiving paid rest breaks.

[1] Commission pay is usually (though not always) subject to a written contract between the employer and employee.  While the specific terms of payment (such as commission rates, when commissions are deemed earned, and return policies) may be governed by contract; provisions will not be enforced that are illegal, unconscionable, contrary to public policy, or otherwise undermine or abridge statutory rights.  See LC § 219 (providing that “…no provision of this article can in any way be contravened or set aside by a private agreement, whether written, oral, or implied”); Civil Code § 3513 (“…a law established for a public reason cannot be contravened by a private agreement”); Hudgins v. Neiman Marcus Group, Inc. (1995) 34 Cal. App. 4th 1109, 1124 (defendant could not use an employment agreement by which it required its employees to consent to unlawful deductions from their wages). See also Koehl v. Verio, Inc. (2006) 142 Cal.App.4th 1313, 1330; Nein v. HostPro, Inc. (2009) 174 Cal. App. 4th 833, 853; Nordstrom Commission Cases (2010) 186 Cal. App. 4th 576, 584-585; and Steinhebel v. Los Angeles Times Communications, LLC (2005) 126 Cal.App.4th 696, 705.

[1] (1987) 197 Cal. App. 3d 557, 563-564.

[1] Virtually all reported cases in California and California’s federal jurisdictions addressing commission compensation are brought as misclassification cases, challenging an employer’s classification of sales employees as exempt under LC § 1171 and the IWC orders applying its provisions.  However, as noted above, such cases require a parallel Ramirez analysis of tasks performed as exempt (selling) or non-exempt (non-selling) tasks, so their holdings on these points apply directly to the question at issue here.

[1] Keyes, supra, 197 Cal. App. 3d at 564.

[1]  Id.

[1] Keyes clarified that commissions cannot be paid for either making the goods, or performing the services sold—commissions only pay for selling goods or services.  Id, see also Ramirez, supra, 20 Cal. 4th at 804 (the employee’s sales duties must not include “making the product or rendering the service” if the test is to be satisfied). This distinction may be significant in certain factual contexts, such as when a salesperson also performs the service sold or a retail employer argues that assembling a floor model is a “service rendered in the sale.”

[1] Id at 803–804

[1]  Id at pp. 803, discussing the Commissioned Employee exception and citing Wage Order No. 7-80(3)(e) and its successor, Wage Order No. 7-89(3)(B) [now Wage Order 4-2001(3)(D)], which state that “[p]rovisions of [overtime compensation] shall not apply to any employee whose earnings exceed one and one-half (1 ½) times the  minimum wage, if more than half (1/2) of that employee’s compensation represents commissions.”

[1] Id at 802.

[1] Id at 803.

[1] Id at 803-804.

[1] See Romero v. Producers Dairy Foods, Inc. (E. D. Cal. 2006) 235 F.R.D. 474, 487-488 (recognizing that both elements of the Ramirez test must be present for a compensation scheme to constitute commission wages); Lynne Wang v. Chinese Daily News, Inc. (C. D. Cal. 2006) 435 F. Supp. 2d 1042, 1062 (“…with regard to whether salespersons receive “commissions” as that word is meant under California law, the compensation scheme must meet two requirements…;” if salespersons receive pay based on the number or size of ads sold, rather than a percentage of the sale price, their pay is not commission); Harris v. Investor’s Business Daily (2006) 138 Cal. App. 4th 28, 37 (in Ramirez, “…the Supreme Court defined two essential requirements for finding that a compensation scheme involves commissions…”); Takacs, supra, 444 F. Supp. 2d 1100 (the Ramirez/Keyes requirements that must be met before a compensation scheme is deemed to constitute “commissioned wages”).

[1] Keyes, supra, 197 Cal. App. 3d at 562.

[1] The court alluded to this issue in Steinhebel, supra, 126 Cal. App. 4th 696, wherein it rejected a challenge brought by subscription salespersons to the defendant’s policy of “charging back” commissions on cancelled subscriptions because it found that the minimum wage base pay they received covered the time they spent selling the cancelled subscriptions.  This suggests that time spent on sales that prove unsuccessful in generating commissions must be compensated by another type of wage.

[1] Under the FSLA and other federal authority, employers may be permitted to average commission wages as long as the averaging period does not exceed a single workweek (or otherwise violate applicable law).  See Takacs, supra, 444 F. Supp. 2d at 1114, citing 29 CFR § 778.104.

[1] (2005) 135 Cal. App. 4th 314, 324.

[1] Id at 317-319.

[1] The Armenta court did not address LC § 204, although the author submits that the plaintiff might also have alleged violation of this statute under the facts.  The court found that the employer’s averaging scheme violated LC § 221 (“It shall be unlawful for any employer to collect or receive from an employee any part of wages theretofore paid by said employer to said employee”), § 222 (dealing with collective bargaining agreements) and § 223 (“Where any statute or contract requires an employer to maintain the designated wage scale, it shall be unlawful to secretly pay a lower wage while purporting to pay the wage designated by statute or by contract”).

[1] The holding of Armenta is supported by a strong foundation of earlier case law, including cases demonstrating that the total sum an employee earns does not impact an analysis of whether he or she is properly paid under applicable law. In Kerr’s Catering v. DIR (1962) 57 Cal. 2d 319; Hudgins, supra, 34 Cal. App. 4th 1109; and Quillian v. Lion Oil Co. (1979) 96 Cal. App. 3d 156; the plaintiffs always received compensation that equaled or exceeded the minimum wage.  Yet in each case the court held that the defendant-employer’s actions violated the California Labor Code.

[1] (E. D. Cal. 2009) 2009 U.S. Dist. LEXIS 13073 at ¶¶ 8-10.

[1] Id at 14.

[1] Id at ¶¶ 10-11, quoting Armenta at 323. The Ontiveros court further rejected the defendant’s contention that Fitz-Gerald v. SkyWest Airlines, 155 Cal. App. 4th 411 (2007) showed narrowness in the Armenta holding, noting that the central issue SkyWest involved preemption of plaintiffs’ action for violation of state minimum wage laws under the Railway Labor Act, and the court expressly distinguished Armenta on the ground that it did not deal with preemption.  It explained, “Labor Code sections 221 and 222 prohibit an employer from paying an employee less than minimum  wage for each hour worked, whether through a wage agreement or not. The SkyWest court recognized this to be the basis for the Armenta court’s holding…”  Id at 12-13.

[1] (2005) 126 Cal. App. 4th 696

[1] Id at 708.

[1] (2004) 34 Cal. 4th 319, 330

[1] Ramirez, supra, 20 Cal. 4th at 802; see also Romero, supra, 235 F.R.D. at 488.  While a discussion of special concerns that may arise in the class action context are beyond the scope of this article, it should be noted that while employers may argue that an examination of each worker’s time and tasks is required, thus defeating commonality, the correct focus is on the objective requirements of a particular job.  See Sav-On, supra, 34 Cal. 4th at 337-388.

[1] 20 Cal. 4th  at 803 n. 5

[1] Armenta, supra, 135 Cal. App. 4th at 323

[1] Id.

[1]See Hudgins, supra, 34 Cal. App. 4th 1109;  Steinhebel, supra, 126 Cal. App. 4th at 705

[1] Failure to pay commissions as posted may also give rise to a violation of LC § 204.

[1] See Agnew v. Cameron (1967) 247 Cal. App. 2d 619, 624 (employer has a duty to make explicit the terms of employment, particularly in situations where the employer demands the return of previously transferred funds).

[1] A UCL violation was found in Hudgins, supra, 34 Cal. App. 4th at 1126-1127.