California Employers Must Now Pay Commissioned Employees Separate Rest Period Pay

In February 2017, a California appellate court made a ruling that significantly impacts the way commissioned employees are paid. In Vaquero v. Stoneledge Furniture LLC, the court held that pay plans providing for draws and commissions do not compensate employees for their mandatory paid rest breaks. Many California employers who utilize such pay structures to compensate inside salespeople will therefore need to adjust their commission-based pay plans.

Although the most suitable solution will vary based on the needs of each employer, all employers utilizing a commission-based system for inside salespersons are encouraged to evaluate their pay plans to make sure they comply with Vaquero.

Background

Under California law, employers are required to provide nonexempt employees working at least 3.5 hours in a workday with a 10-minute paid, duty-free rest period for every four hours worked or major portion thereof. Rest periods are counted as hours worked for which “there shall be no deduction from wages.” California courts have interpreted this to mean that employees paid on a piece-rate basis must be paid separately for nonproductive time, including rest periods.

In Vaquero, the court extended this rationale to commission-based employees. The plaintiffs in Vaquero were furniture salespersons who earned a percentage of sales with a guaranteed draw against commissions of at least $12.01 for each hour worked. The draw was implemented to compensate employees in accordance with California’s inside sales exemption, which requires that employees be principally engaged in sales, earn more than 50 percent of their total compensation from commissions and earn an average hourly rate of total compensation that exceeds 1.5 times the minimum wage, which was $8.00 during the relevant time period. Any draws that the employees received were deducted from future commissions.

Although dividing the total hours worked by total earnings in a pay period is a sufficient method of making sure that employees are paid at least minimum wage for all hours worked under federal law, the Vaquero court determined that this pay structure did not comply with California law because it did not directly compensate employees for rest breaks. The court reasoned that salespersons who were paid their commission received the same amount of compensation regardless of whether they took rest breaks, and when salespersons were paid the minimum rate of $12.01 per hour, the advances were later deducted from commissions. The court stated that these draws were not compensation at all, and were at best interest-free loans. Thus, according to the court, employees were not compensated for rest periods in either situation. The court therefore held that commission-based pay plans must separately account for rest periods and must separately pay for them from sources other than commissions.

Employee Implications

Since the minimum wage law does not affect outside sales employees who spend more than half of their time away from the office, the Vaquero decision does not affect the manner in which these employees are paid. However, employers utilizing commission-based pay plans for inside salespersons should review their plans to ensure compliance with the current law. Many employers will need to modify their plans and, if they are not already doing so, should begin keeping track of rest breaks taken by employees. Although the Vaquero court did not provide guidance on how to best comply with the law, there is more than one method available.

One solution is to pay employees commissions for sales activities but separately track and pay hourly compensation of at least the minimum wage for rest periods. Another method is to pay employees a base hourly rate of at least the minimum wage and, on top of that, offer a percentage of sales. One advantage of this method is that employers do not have to be as concerned with paying for rest periods separately, since employees are being compensated by hours worked, including rest periods. However, if this method results in base wages exceeding 50 percent of total compensation, the employees would no longer qualify for the inside sales exemption and would therefore be entitled to overtime compensation.