CA commissions cannot be allocated across pay periods

Answering a certified question from the Ninth Circuit, the California Supreme Court held that Time Warner may not allocate or attribute commission wages paid in one pay period to other pay periods in order to satisfy California’s compensation requirements for commissioned salespersons. Specifically, an employer satisfies the minimum earnings prong of the commissioned employee exemption only in those pay periods in which it actually pays the required minimum earnings, which are one and one-half times the minimum wage. An employer may not satisfy the prong by reassigning wages from a different pay period.

An advertising account executive filed a state court class action suit alleging, among other things, minimum wage and overtime violations and late payment of wages under California law. Her argument was that her earnings did not exceed one and one-half times the minimum wage at all relevant times for the exemption from overtime for commissioned salespersons to apply. Under Time Warner’s commission plan, commissions were paid only on a monthly basis, so during approximately half of the biweekly pay periods, it was undisputed that the employee’s pay was insufficient to qualify for the commissions-paid exemption from overtime, even though she regularly worked more than 45 hours per week. The majority of her paychecks included only hourly wages, and so were less than one and one-half times the minimum wage. If considered on a paycheck-by-paycheck basis, the overtime exemption would not always apply.

Reassigning commissions paid. The analysis of whether the employee’s earnings exceeded one and one-half times the minimum wage turned on how commissions could be allocated over pay periods under California law. Time Warner argued that commissions should be reassigned from the biweekly pay periods in which they were paid to earlier pay periods, reasoning that the commissions should be attributed to the “monthly pay period for which they were earned.” This approach would not only satisfy the overtime exemption’s minimum earnings prong (e.g., one and one-half times the minimum wage), but it also would mean that the account exec’s compensation was, at all times, higher than the applicable minimum wage.
Certified question. Time Warner removed the case to federal court, where the district court granted summary judgment, and the Ninth Circuit affirmed in part, but it certified the state law question to the California Supreme Court, which reformulated it as: “May an employer, consistent with California’s compensation requirements, allocate an employee’s commission payments to the pay periods for which they were earned?” The California Supreme Court said no.

Commissioned employee exemption. Time Warner claimed the account exec was an exempt commissioned employee, and under the asserted exemption in Wage Order No. 4, overtime provisions do not apply to any employee whose earnings exceed one and one-half times the minimum wage if more than half of that employee’s compensation comes from commissions. The only way that prong could be satisfied here, however, was if commission wages paid in one biweekly pay period could be attributed to other pay periods, because it was undisputed that the majority of the account exec’s biweekly paychecks did not satisfy the exemption’s minimum earnings prong, i.e., her earnings did not exceed $12 per hour, or “one and one-half . . . times the minimum wage.”
Time Warner primarily argued that, although it issued the account exec a paycheck every two weeks, “(1) it permissibly used a monthly pay period when paying commission wages, and (2) in order to determine earnings for purposes of the exemption, commission wages should be attributed not to the pay periods in which they were paid, but instead to the weeks of the monthly period in which they were earned.”

Monthly pay period? The court began by pointing out it was going to construe the statutes (and wage orders of the Industrial Welfare Commission) broadly in favor of protecting employees and narrowly construe exemptions against the employer. Under Labor Code Sec. 204(a), all wages earned “are due and payable twice during each calendar month,” and wages includes “all amounts for labor performed,” including amounts earned on a commission basis (Sec. 200(a)). In other words, said the court, all earned wages, including commissions, must be paid no less frequently than semimonthly. Moreover, limited statutory exceptions do exist, demonstrating to the court that “the Legislature knows how to establish a different payroll period when it wishes to do so.”

Semimonthly pay period is required. The court had no trouble with Time Warner’s commission plan requirements that three events must occur before commissions can be paid; for example, that receipt of a client’s payment must occur before any commissions on sold advertising are earned. Commissions are owed only when they have been earned, even if it is on a monthly, quarterly, or less frequent basis. But, stressed the court, “this does not create a monthly pay period in contravention of section 204(a),” which establishes semimonthly pay periods.

In order to comply with the law, Time Warner wanted to attribute the account exec’s commissions, always paid on the final biweekly payday of each month, to the weeks of the preceding month. The employer’s ability to satisfy the minimum earnings prong was dependent on its ability to attribute commissions in this way. But the state supreme court said it could not do so, ruling that “[w]hether the minimum earnings prong is satisfied depends on the amount of wages actually paid in a pay period. An employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall.” (Peabody v Time Warner Cable, Inc, July 14, 2014, Corrigan, C, case number S204804.)

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