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Paying minimum hourly rate as advance on commissions not sufficient, California Court of Appeal rules
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Workers paid on commission must get separate compensation for legally required rest periods, the California Court of Appeal ruled in February. Further, an employer violated this requirement by paying employees a guaranteed minimum hourly rate as an advance on commissions earned in later pay periods, the court said.
Ricardo Bermudez Vaquero and Robert Schaefer worked as sales associates for Stoneledge Furniture, a retail furniture company. After they were fired, Vaquero and Schaefer filed a class-action complaint alleging that Stoneledge's commission pay plan did not comply with California law.
Stoneledge paid sales associates on a commission basis. If a sales associate failed to earn minimum pay of at least $12 an hour in commissions in any pay period, the company paid the associate a "draw" against "future advanced commissions." The amount of the draw was deducted from future commissions, but an employee would always receive at least $12 an hour for every hour worked.
Sales associates did not earn separate compensation for work not involving sales, such as time spent in meetings, on training and during rest periods. Sales associates recorded this time, however, using Stoneledge's electronic timekeeping system. The company allowed sales associates to take rest periods of at least 10 consecutive minutes for every four hours worked.
[SHRM members-only HR Q&A: What are the meal and rest break requirements for California employees?]
Stoneledge claimed that under its compensation plan, all time during rest periods was recorded and paid as time worked. Therefore, sales associates were paid at least $12 an hour even if they made no sales. Although the company deducted from sales associates' paychecks any previously paid draw on commissions, the deduction was not taken if it meant an employee would earn less than $12 an hour for all time worked in any week.
Vaquero and Schaefer claimed that Stoneledge failed to pay for rest periods. Stoneledge sought to dismiss the claims before trial, arguing that it paid its sales associates a guaranteed minimum wage for all hours worked, including rest periods.
The trial court dismissed the claims, noting that under Stoneledge's payment system, "there was no possibility that the employees' rest period time would not be captured in the total amount paid each pay period."
Vaquero and Schaefer appealed, and the appellate court reversed.
Wage Order Requires Separate Compensation for Rest Periods
Under the California Industrial Welfare Commission's wage orders, employers must provide nonexempt employees with a paid 10-minute rest period for every four hours of work. Rest periods must be counted as hours worked "for which there shall be no deduction from wages." The order applicable here, Wage Order 7, applies "to all persons employed in the mercantile industry whether paid on a time, piece rate, commission or other basis."
In a 2013 case, the California Court of Appeal ruled that the wage order required employers to separately compensate workers for rest periods where the employer uses an "activity-based compensation system" that does not directly pay for rest periods (Bluford v. Safeway Stores Inc., 216 Cal.App.4th 864). Although Bluford involved employees paid by piece rate and not those earning commissions, the court in Stoneledge concluded that "Wage Order No. 7 applies equally to commissioned employees, employees paid by piece rate or any other compensation system that does not separately account for rest breaks and other nonproductive time."
Plan Does Not Comply with Law
Stoneledge claimed that its commission plan complied with California law because sales associates' rest breaks were counted as hours worked and that time was not deducted from wages. The court noted that the company did treat break time the same as work time but said that the company violated California law by failing to directly compensate sales associates for rest periods.
"The advances or draws against future commissions were not compensation for rest periods because they were not compensation at all," the court said. "At best they were interest-free loans."
Therefore, the court concluded, "when Stoneledge paid an employee only a commission, that commission did not account for rest periods. When Stoneledge compensated an employee on an hourly basis (including for rest periods), the company took back that compensation in later pay periods. In neither situation was the employee separately compensated for rest periods."
Vaquero v. Stoneledge Furniture LLC, Calif. Ct. App., No. B269657 (Feb. 28, 2017).
Professional Pointer: Employers should consider consulting with legal counsel to determine whether their commission payment plans adequately compensate salespeople for rest breaks and other nonselling time. Reviewing—and possibly making changes to—commission-pay agreements may help prevent future litigation.
Joanne Deschenaux, J.D., is a freelance writer based in Annapolis, Md.
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