Commission-Only Employees Must Be Paid Separately for Rest Periods
April 18, 2017
By Brian M. Ragen
In Vaquero v. Stoneledge Furniture LLC, a California Court of Appeal recently held that inside sales employees who are paid on a 100% commission basis must be separately compensated for their rest periods.
Though inside sales persons are exempt from overtime (provided they earn at least 1.5-times minimum wage and earn more than half of their compensation from commissions), they are not exempt from California’s meal and rest period requirements. Thus, the Court’s logic was as follows: Inside sales employees must receive at least one paid rest period of 10 minutes for every four hours worked. If 100% of an employee’s pay is attributable to commissions, then he or she is not being compensated for rest periods—i.e., an employee cannot earn a commission while “resting,” so an employee paid only commissions must not be receiving pay for rest periods.
Notably, the Court’s reasoning applies even where an employee receives a minimum amount each pay period, if that minimum amount is treated as a “draw” or an “advance against commissions.” (For example, in order to preserve the overtime exemption, it is common to ensure that inside salespersons receive at least 1.5-times minimum wage every pay period, but later to treat those payments as advances against earned commissions.) Indeed, in Vaquero, the sales employees were paid on a 100% commission basis, but if they failed to earn at least $12.01 per hour in any given pay period, they received “Minimum Pay” of $12.01 per hour as a “draw” against future commissions. (At the time, this amount exceeded 1.5 times the then-applicable $8 per hour minimum wage.) The commission agreement explained, “The amount of the draw will be deducted from future [commissions], but an employee will always receive at least $12.01 per hour for every hour worked.” With respect to meal periods, the Court disapproved of this arrangement, finding that an employee who was paid 100% commissions could not possibly be receiving pay for rest periods, noting, “[T]he purpose of a rest period is to rest, not to work.”
In reaching its conclusion, the Court relied heavily on a line of cases involving piece-rate workers (i.e., employees who are paid a fixed rate for each task they complete, such as sewing a garment, or changing the oil on a vehicle). In that context, it is clear that employees who receive only their piece rate are not being compensated for rest periods, because no work towards completing a “piece” can be accomplished during rest periods. Despite their differences, the Vaquero Court found that commission pay systems and piece-rate systems were essentially identical in their treatment of rest breaks: “The commission agreement used by Stoneledge . . . is analytically indistinguishable from a piece-rate system in that neither allows employees to earn wages during rest periods.”
Does Vaquero mean that we need to revise our commission plan?
If your sales employees are paid 100% commission—even if they receive a minimum “draw” or “advance against commissions” each pay period—it is virtually certain that you will need to revise your commission plan. If your inside sales employees receive a base salary plus commissions, it would be wise to ensure that the base salary is sufficient to cover all rest periods, and to state expressly in your commission plan that the base salary is intended to include rest period pay.
If we pay rest periods separately, what hourly rate should we use?
This remains unclear after Vaquero. Arguably, nothing prevents employers from paying rest periods at 1.5 times minimum wage—regardless of how much the sales employee earns in commissions during the pay period. But when similar cases arose in the piece-rate context (requiring employers to pay piece-rate employees separately for their rest periods), the California Legislature quickly introduced Labor Code section 226.2, which requires employers to pay piece-rate employees for rest periods at their “regular rate,” i.e., their total compensation for the pay period divided by their hours worked for the pay period. The Division of Labor Standards Enforcement may apply a similar rule with respect to commissioned employees or the Legislature could pass similar legislation in the commission context in light of Vaquero.
I thought sales persons were exempt from most wage and hour rules. What gives?
Outside sales persons are exempt from overtime and meal and rest period requirements. To qualify for this exemption, the employee must spend more than half of his or her time outside of the office engaged in sales activities.