Commission-Only Pay Plan May Jeopardize Overtime Exemption

It's no secret. The "great recession" over the past several years has not been kind to the automobile industry. And for car salespersons, no sales means no commissions. But the sales staff can't go unpaid. They must receive minimum monthly compensation—either base pay, a draw against future commissions, a guarantee or otherwise. Without that, the dealership jeopardizes the validity of its overtime exemption policy and that may lead to exposure for past unpaid overtime, wages, penalties, and interest for all of the dealership's sales staff.

Markson Pico LLP recently met with a potential client who worked as a salesperson for a used car dealership. The potential client struggled through a dry spell often receiving paychecks amounting to less than the minimum hourly wage, and on occasion, no paycheck at all. This client felt that something was legally wrong. And he was sure right about that.

The California Supreme Court has approved a two-part test to determine whether an employee is a commissioned salesperson exempt from overtime. First, an employee must be involved principally in selling a product or service. Second, the amount of the employee's compensation must be a percent of the price of the product or service. Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785.

But that 's not the end of the inquiry. The employer's pay plan must be a bona fide commission plan to justify reliance on the exemption. To that end, the sales staff must consistently earn or receive commissions in excess of one and one half the minimum wage. California Industrial Welfare Commission (IWC) wage order No. 7-2001 exempts from the overtime compensation requirement "any employee whose earnings exceed one and one-half (1 1/2) times the minimum wage if more than half of that employee's compensation represents commissions." (Cal. Code Regs., tit. 8, § 11070, subd. (3)(D).) Labor Code § 204.1, applicable to employees of vehicle dealers provides: "Commission wages paid to any person employed by an employer licensed as a vehicle dealer ... are due and payable once during each calendar month ... . 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."

The DLSE's Enforcement Policies and Interpretations Manual (June 2002) section, dealing with the commissioned salesperson exemption, explains: "The [commissioned salesperson] exemption will not be met unless the employee receives earnings for each period (not exceeding a weekly period) of more than one and one-half times the applicable minimum wage…"

Further, section 50.6.1(4) of the Manual provides: "To test for whether the compensation arrangement is a bona fide commission plan, California law also uses a period of at least one month. Consistent commission earnings below, at, or near the draw are indicative of a commission plan that is not bona fide. If the commission plan is found to be invalid, overtime will be due for all weeks in which the exemption was claimed."

"[T]he assertion of an exemption from the overtime laws is considered to be an affirmative defense, and therefore the employer bears the burden of proving the employee's exemption." Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 794-795. Thus, it is the former employer's burden to prove that it had a bona fide commission scheme under which salesperson employees earned a minimum of one and one-half times the minimum wage for each period.

To ensure that wages stay above the minimum threshold needed to satisfy the commissioned salesperson exemption, employers typically include minimum guaranteed base pay in their compensation plans. See, Areso v. Carmax, Inc. (2011) 195 Cal.App.4th 996, 1000 [guaranteed minimum exceeding one and one-half times minimum wage]; Muldrow v. Surrex Solutions Corporation (2012) ___ Cal.App.4th ___ (2012 Cal. App. LEXIS 39) [monthly draw—an advance on commissions to be earned in the future—in an amount exceeding one and one-half times minimum wage]. Such guaranteed minimum payments are permissible to preserve the compensation plan's exempt status for commissioned employees. Section 35.1.3 of the DLSE Manual outlines a framework for such 'advances,' 'draws,' or 'guarantees' for commissioned employees.

Getting back to our potential client's situation, his employer's plan itself offers no guarantee that the employees will earn at least one and one-half times minimum wage. And in practice, the employees faced numerous pay periods in which they received less than the minimum wage. Under California law, because the employer's plan lacks a built-in safety net for the commissioned employees, its pay plan is not a bona fide commission plan. As such, the dealership faces multi-million dollar financial exposure for wage and hour violations as to all employees working under the invalid plan.

Markson Pico LLP is committed to protecting the rights of employees, including representation of employees in wage and hour cases. Click here to contact a lawyer from Markson Pico LLP.

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