Employers: Did you know that inside sales commission-based employees must be separately paid for their rest breaks? In another win for employees across the state, a California court recently held that certain employees paid on commission are also covered by the Industrial Welfare Commission (IWC) Wage Order requirement that “rest period time shall be counted as hours worked for which there shall be no deduction from wages.” Last year, an appellate court held that employees who are paid on a piece-rate basis must be separately compensated for rest breaks and other non-productive time. Now, another Court of Appeals has extended this requirement to employees who are paid on a commission basis.
Inside sales commission
To put it simply, a California employer who pays inside sales employees on a draw against commission violates state law by not compensating employees for their mandatory paid rest breaks and other non-selling working time. It is important to note that outside sales employees, who spend more than half their time away from the office engaged in selling activities, are not affected by the this case as the minimum wage law does not apply to outside salespersons.
This decision relied heavily on past holdings that piece-rate workers must be paid separately for rest breaks (read more of my thoughts on piece-rate compensation here) and is the latest in a line of cases in which California courts have rejected the approach taken under federal law to determine whether employees are paid at least minimum wage for all hours worked (i.e, divide total hours worked into total earnings for the pay period). Under the federal law approach, if the result of this calculation is at least the minimum wage, the employee’s pay is sufficient.
In California, rest periods are paid time. For an employee paid by the “piece” (i.e. truck drivers paid by the mile driven), must receive separate pay for rest periods. California Labor Code section 226.2 covers this issue in detail.
In the case at hand sales-based employees were paid against a draw per company policy. The draw, a guaranteed minimum hourly rate vs. commission, was then deducted from later earned commissions, and the employee was always paid at least the minimum wage for all hours worked. Two former sales associates were not pleased with this company policy and filed a class action against the employer alleging that the company’s failure to separately compensate them for rest breaks amounted to an illegal deduction from wages, and, as a result, violated both the California Labor Code and IWC Wage Orders.
While the trial court ruled that the employer’s policy was in accordance with applicable laws, the Court of Appeal disagreed. Concluding that the need to separately compensate employees for rest periods “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 non-productive time”, it now follows that California employers with other forms of productivity-based compensation plans are now at serious risk if those plans do not allow for separate compensation for rest breaks.
What should employers do?
Considerations for employers with California employees paid on commission include:
- Pay – and pay separately – at least minimum wage for commissioned employees’ rest breaks. Extended beyond inside sales associates in order to err on the side of caution and in line with the pro-employee approach California courts have been taking.
- Do not deduct rest break pay against a draw. Considering having employees log the time they spend in meetings, training sessions and on paid rest breaks and pay them separately for such time at a rate that is at least minimum wage.
- Make rest break pay a distinct line-item on employee pay statements.
This list is not exhaustive. To review your company policy regarding employee compensation, or to discuss the impact this decision could have on your business, contact experienced business attorney Drew E. Pomerance today.