If your company has employees who are classified as exempt, but are earning commissions it may be time to reevaluate whether those employees are truly exempt under recent case law.
The California Court of Appeal recently issued a decision clarifying that a salary based solely upon commissions does not constitute a “salary” for purposes of determining whether an employee is paid twice the minimum wage in order to be properly classified as exempt under the Administrative Exemption.
Under the Administrative Exemption, an employee must be paid a “salary” of at-least twice the state minimum wage. This is one of two requirements that must be met in order to properly classify an employee as exempt. The recent case solely determined the issue of what type of pay is considered a “salary” in order to meet this basic test, but did not reach the more fact intensive and complicated question as to whether the certain job duties satisfied the exemption’s requirements.
In Simprini v. Wedbush Securities, Inc., Wedbush classified its Financial Advisors as exempt under the Administrative Exemption. The Financial Advisors were paid on a commission-only basis. If their commissions did not meet the double the California minimum wage standard, Wedbush would pay the advisors their commissions due plus a draw, or advance on future commissions in an amount equal to the difference between the commissions earned and double the minimum wage. Advisors were required to repay the draw and carry it forward as a deficit until it is paid off. The advisors argued that this commission only salary did not satisfy the salary requirement to permit them to be classified as exempt.
The Court explained that a “salary,” is a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. A salary based solely on commission that fluctuated each month based on the employee’s performance and the quantity of their sales is not a “salary” for purposes of the Administrative Exemption.
Furthermore, the Court held that a draw on commissions is not yet earned and cannot constitute a wage or salary. The salary basis test requires employers to pay their employees at least double the minimum wage, not loan them that amount. Thus, a commission only salary will not satisfy the wage basis test required for the Administrative Exemption.
A determination of whether an employee is exempt is a complicated task and misclassification can come with hefty penalties and significant liability. If you have any questions about the proper classification of your employees please contact Nicholas Roxborough at (818) 992-9999, ext. 222, Drew Pomerance at ext. 212, Michael Adreani, at ext. 234, Marina Vitek, at ext. 236, or Trevor Witt, at ext. 224.