Ninth Circuit Looks to the California Supreme Court for Clarification of the Commission Overtime Exemption

The Ninth Circuit has recently requested the California Supreme Court to address the proper method of calculating employee commission payments to determine qualification for California’s commission salesperson exemptionset forth in theIndustrial Welfare Commission (“IWC”) Wage Order Nos. 4 and 7. An employee generally can qualify for this exemption if: (1) they work for an employer who is covered by Wage Order Nos. 4 or 7; (2) the employee ispaid more than one and one-half times the state minimum wage; (3) more than half of the employee’s compensation represents commissions; and, (4) the employee is primarily engaged inthe sales of a service or product. However, California law currently provides no guidance as to how commissions should be allocated across pay periods to determine whether employees meet the one and one-half times minimum wage requirement.

The Ninth Circuit faced this issue in Peabody v. Time Warner Cable, (9th Cir. 10-56846 8/17/12). Peabody, a former sales executive, sued the Company for unpaid overtime. Working approximately 45 hours per week, Peabody’s base salary amounted to approximately $8.55 per hour without commissions. Peabody alleged she met the one and one-half minimum for the exemption only for those pay periods in which she received commissions. However, Time Warner paid commissions based on a “broadcast month” schedule, a period of four to five weeks. Time Warner argued that it could average those commissions across the entire broadcast month to meet the one and one-half time minimum wage for all weeks worked. Peabody argued that commissions could only be allocated to the pay period in which they were paid. Accordingly, Peabody argued that she fell short of the one and one-half times minimum wage requirement for approximately half of her pay periods.

The Ninth Circuit acknowledged that California law provideslittle guidance on the proper calculation of compensation for the purposes of the commissioned sales exemption. Faced with two competing methods, the Court requested that the California Supreme Court determine “whether an employer can average an employee’s commission payments over certain pay periods” to satisfy California’s compensation requirement for the exemption.

The Ninth Circuit has agreed to accept the California Supreme Court’s interpretation of the issue. The question is of particular importance to any employer under the two Wage Orders who are attempting touse the overtime exemption. Employers are also reminded that an employee must meet a state and federal overtime exemption in order for an employee to be exempt from both state and federal overtime requirements. There are potential situations wherean employer could meetthe California commission exemption but not meet the commission exemption under the Fair Labor Standards Act (“FLSA”), known as the Section 7(i) exemption. Also, employers who are not subject to Wage Order 4 or 7 should not attempt to utilize this commission exemption under California law. We will continue to provide updates on this issue as it develops.