This week, in Vaquero v. Stoneledge Furniture LLC, a California appellate court issued a decision explaining employer’s obigations to separately compensate employees paid on a commission basis for rest breaks.

Plaintiffs worked as sales associates for Stoneledge Furniture, LLC, a retail furniture company doing business in California as Ashley Furniture HomeStores.  Stoneledge paid the sales associates on a commission basis.  The compensation agreement set out that if a sales associate failed to earn “Minimum Pay” of at least $12.01 per hour in commissions in any pay period, Stoneledge paid the associate a “draw” against “future Advanced Commissions.”  The commission agreement required that “[t]he amount of the draw will be deducted from future Advanced Commissions, but an employee will always receive at least $12.01 per hour for every hour worked.”

The issue addressed by the court was employees paid on a commission basis entitled to separate compensation for rest periods as required by California law, and if so, did Stoneledge’s draw-based compensation system pay for rest breaks?  This Friday’s Five addresses five takeaways from the court’s holding for California employers.

1. IWC wage orders

The appellate court explained that the legislature authorized the Industrial Welfare Commission (IWC) to regulate “the wages, hours, and working condition of various classes of workers to protect their health and welfare.”  The IWC has promulgated wage orders that set out regulations based on industries, and there are currently 18 wage orders.  The court explained: “As a consequence, ‘wage and hour claims are today governed by two complementary and occasionally overlapping sources of authority: the provisions of the Labor Code, enacted by the Legislature, and a series of 18 wage orders, adopted by the IWC.’”  Even though the IWC was defunded in 2004, the wage order are still in effect.  A list of the  Wage Orders for the various industries can be found here.

2. Rest periods

With respect to rest periods, Wage Order No. 7 provides:  “Every employer shall authorize and permit all employees to take rest periods, which insofar as practicable shall be in the middle of each work period. The authorized rest period time shall be based on the total hours worked daily at the rate of ten (10) minutes net rest time per four (4) hours or major fraction thereof.  However, a rest period need not be authorized for employees whose total daily work time is less than three and one-half (3 1/2) hours.  Authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages.

Wage Order No. 7 requires employers to count “rest period time” as “hours worked for which there shall be no deduction from wages.”  (Cal. Code Regs. tit. 8, § 11070, subd. 12(A), italics added.)  In Bluford v. Safeway Stores, Inc. (2013) 216 Cal.App.4th 864 the court interpreted this language to require employers to “separately compensate[ ]” employees for rest periods where the employer uses an “activity based compensation system” that does not directly compensate for rest periods.  (Id. at p. 872.)

3. Piece-rate workers must be paid for rest periods and non-productive time under Labor Code Section 226.2

Piece-rate workers are paid “according to the number of units turned out.”  For example, piece-rate workers are paid for the amount of produce harvested, the number of miles driven, or the yard of carpet installed.  Employers cannot deduct wages for rest periods from piece-rate workers, and therefore employers must separately compensate employees for rest periods.

Employers who paid employees on a piece rate basis must comply with Labor Code section 226.2.  Under Labor Code section 226.2, piece-rate workers must be paid for “rest and recovery periods and other nonproductive time separate from any piece-rate compensation.”  The law requires employers to calculate the regular rate of pay for each workweek, and then pay the piece-rate employees the higher of this regular rate of pay or the applicable minimum wage for rest break time.  The law also requires employers to pay piece-rate employees for “nonproductive time” which is defined as “time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis.”  The nonproductive time is required to be paid at a rate no less than the applicable minimum wage rate.  In addition, employers who pay employees on a piece-rate basis need to report the pay for rest breaks, recovery periods, and nonproductive time separately on the employees’ pay stubs.

The court explained that piece-rate compensation plans do not directly account for and pay for rest periods because the employee is not working during the rest period and therefore is not being paid.  The Wage Order requires employers to separately compensate employees for rest periods if an employer’s compensation plan does not already include a minimum hourly wage for such time.

4. The court in Stoneledge held that the requirement to separately pay for rest periods applies to employees paid on commission as well

The primary holding Stoneledge is that Wage Order No. 7 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 nonproductive time.”

The court found that the commission agreement used by Stoneledge was “analytically indistinguishable from a piece-rate system in that neither allows employees to earn wages during rest periods.”  The court explained that “[w]hen an employer pays its employees by the piece… those employees cannot add to their wage during rest breaks; a break is not for rest if piece-rate work continues.” The court held that Labor Code Section 226.2, which requires piece-rate workers to be compensated for rest, recovery, and other nonproductive time, applies to commissioned employees as well.

5. Commission arrangements that advance wages that are offset against future commission earnings do not compensate employees for rest breaks

The court held that Stoneledge’s commission agreement did not properly compensate for rest periods taken by sales associates who earned a commission instead of the guaranteed minimum payment.

Stoneledge argued that under the compensation plan “all time during rest periods was recorded and paid as time worked identically with all other work time. . . .  Thus, Sales Associates are paid at least $12 per hour even if they make no sales at all.”  Even though Stoneledge deducted previous draws on commissions paid to the sales associates, Stoneledge argued that the “repayment [was] never taken if it would result in payment of less than the [Minimum Pay of $12.01 per hour] for . . . all time worked in any week.” Therefore, Stoneledge contended that the rest breaks were paid.

However, the court did not agree:

For sales associates whose commissions did not exceed the minimum rate in a given week, the company clawed back (by deducting from future paychecks) wages advanced to compensate employees for hours worked, including rest periods.  The advances or draws against future commissions were not compensation for rest periods because they were not compensation at all.  At best they were interest-free loans.

Piece-rate and commissioned based compensation structures must comply with very strict rules in California.  Employers are wise to have assistance from experienced counsel in drafting the compensation plans to ensure compliance.

Hiring new employees? For the next job oJob offerffer, instead of relying on the old job offer letter you have a lawyer review in the 1990’s, it is recommended to review the offer letter to ensure it is up to date with current law. While some of the items discussed below are not necessarily new aspect to California law, it is always good to review the terms set out in the offer letter to ensure it includes the relevant terms, and incorporates the any changes in the law. Here are the five terms employers should consider to include in job offer letters:

1. At-will designation

It should be clearly set forth that the employee is being hired as an at-will employee, and that employment may be terminated by either party with or without notice at any time. Under California law, it is presumed that all employment is terminable at-will. California Labor Code section 2922 provides: “An employment, having no specified term, may be terminated at the will of either party on notice to the other.” The at-will doctrine means that the employment relationship can be terminated by either party at any time, with or without cause, and with or without advanced notice. Even though the law presumes all employment is at-will, it should be clearly set out in the offer letter as well.

2. Description of the job

It is a good practice to have job descriptions for all positions in a company. If the company does not have a job description, be as detailed as possible about the duties of the position the applicant is being hired for in the offer letter. This will help avoid potential disputes about whether certain duties are essential functions of the position for reasonable accommodation purposes, and could also be evidence in defending claims that the employee was misclassified as exempt. The job offer could also set forth whether the position is non-exempt or exempt, and have the duties reflect the designation.

3.  Integration Clause

Place language into the agreement that the terms set forth in the offer letter supersede any other offers or promises. This type of term is referred to as an integration clause. Including an integration clause into the offer letter will assist in countering any claim later on that other promises were made to the employee at the time of hire and the employer failed to comply with those promises.

4.  Set forth commission terms if employee is eligible for commissions

As of January 1, 2013, all commission agreements must be in writing. The agreement must be signed by the employer and the employee. Employers should review the offer letter to see if the offer letter meets these requirements. If it does not, or the commission structure is too complex to include in the offer letter, commission agreements still must be set out in writing and signed by the employer and the employee. Employers should approach the issue of commissions carefully to ensure that the agreement is properly defined. In addition, in the case of non-exempt hourly employees, employers must be careful on how the commissions will affect the calculation of the regular rate of pay for overtime purposes.

5.  Confidentiality provisions

Set forth if your company will require the employee to enter into a confidentiality agreement. If possible, attached the confidentiality agreement and have the applicant sign the agreement at the same time the job offer is accepted. The offer letter should also contain language to the effect that the applicant does not have any agreements with prior employers that would interfere with their duties and that the applicant will not use any confidential information learned at prior positions with the new employer.

Photo: Mark Seton

In my last post, I wrote about what steps employers should talk to comply with the new employment laws for 2015. This post discusses more generally what employers should audit on a yearly basis. And with the year coming to a close, now is a great time to review these five items:

1. Expense reimbursement and mileage policies.
Employees must be reimbursed for all out of pocket expenses incurred while performing their jobs under Labor Code Section 2802. This includes reimbursing employees for their out of pocket expenses for driving their personal vehicles for business purposes. There are a number of different methods employers may utilize in calculating and paying expense reimbursement, as I have previously written here.

While not required, the employer can utilize the IRS mileage rates established each year to pay employees for their vehicle expenses. The IRS mileage rate for 2015 has been set at 57.5 cents per mile (up from 56 cents in 2014).

2. Deductions from wages.
Generally, employer cannot make deductions from employees’ pay for ordinary business expenses or losses. For example, employers are not allowed to deduct the following items employee’s wages:

  • Ordinary damage or wear and tear to equipment
  • The outstanding balance owned on a loan to an employee in one “balloon payment” for the remaining balance of a loan owed to the employer
  • Deductions from employee’s current pay for past payroll errors
  • For returned items from customers
  • Lost equipment
  • Shipping fees to return items to the employer

3. Reporting time pay
California law requires an employer to pay “reporting time pay” under the applicable Wage Order, which states:

Each workday an employee is required to report for work and does report, but is not put to work or is furnished less than half said employee’s usual or scheduled day’s work, the employee shall be paid for half the usual or scheduled day’s work, but in no event for less than two (2) hours nor more than four (4) hours, at the employee’s regular rate of pay, which shall not be less than the minimum wage.

This issue comes up often times when the employer requires employees to attend meetings during days the employees normally have off. It is important for employers to understand this requirement and schedule employees accordingly.

4. Handbook updates
With California’s new paid sick leave requirement, it may be a good time to review your company’s handbook policies to ensure they are compliant and add a policy for the new law. We are currently reviewing a number of our client’s handbooks. It is like going to the dentist, if you wait too long to update your handbook, it will end up costing you more than if the handbook is revised at least once a year.

5. Review employees who are paid on commissions.

A) Must have written agreements with commissioned employees.
As of January 1, 2013, when an employee is paid commissions, the employer must provide a written contract setting forth the method the commissions will be computed and paid. The written agreement must be signed by both the employer and employee. Commission wages are “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.” Commissions do not include (1) short-term productivity bonuses, (2) temporary, variable incentive payment that increase, but do not decrease, payment under the written contract, and (3) bonus and profit-sharing plans, unless there has been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed.

B) If the commissioned employee is non-exempt, ensure the proper overtime rate is being calculated.
If the employee is non-exempt and the employer is required to pay overtime for work longer than eight hours in one day or more than 40 hours in one week, ensure that the employee’s regular rate of pay is properly calculated for overtime purposes. The DLSE provides a good overview of how to calculate the appropriate regular rate of pay here.

In sales, it is usually the case when the sale is made, but the customer has a set period of time to return the product. This presents an issue for an employer who pays the sales representative a commission. The employer does not want to pay a commission on an item sold that may be returned. On the other hand, the sales representative would like use of the money while waiting to the period of time the customer has to cancel the purchase. Add to the mix California’s very stringent requirements prohibiting chargebacks and protection of employee wages, and the issue becomes very complex. The decision in Deleon v. Verizon Wireless clarified the issue about whether employers may chargeback commissions that have not yet been earned by the sales representative.

The plaintiff, Deleon, worked as a sales representative for Verizon Wireless. He sued Verizon on the basis that its commission plan violated Labor Code section 223 by “secretly pay[ing] a lower wage while purporting to pay the wage designated by statue or by contract.” Verizon contended its chargeback policy did not violate section 223 because: (1) Deleon’s commission payments were advances, not wages; (2) the chargeback policy was set forth in the compensation plans and was not a “secret” underpayment of a lower than agreed-upon wage; and (3) the chargeback provision did not result in a payment of a lower wage than the wage designated in the compensation plans.

In agreeing with Verizon, the court held that while sales commissions are wages, the right to commissions is determined by the “terms of the contract for compensation.” Here, the agreement Verizon had with plaintiff clearly set forth the conditions necessary before a commission was earned. The plan was clear that commissions were only earned if the customer did not discontinue the cell phone service during the applicable chargeback period. The court held that until this chargeback period expired, plaintiff had not made a commission and the amounts provided to plaintiff were only advances. Because Verizon provided plaintiff an advance on the commissions, and if the customer cancelled the service before the chargeback period expired, it was permissible for Verizon to reduce the representative’s next advance as an offset of the cancelled sale.

The take away for employers: commission plans and agreements must be clearly drafted and set forth the conditions that must be met before the commission is earned. It must also set forth that any payments to the sales representative are only advances, not wages, until the sale is final. If the plan is clear, a chargeback against the advances are permissible should the sale not become final with the customer.

Perhaps one of the most misunderstood and improperly applied issues in California is how to treat commissioned sales people. Here are some of the most common mistakes I’ve encountered that can create substantial liability for employers.

Mistake: Treating all commissioned sales people as exempt employees (i.e. paying them a straight salary). 

Usually there are two exemptions that sales people could qualify for: outside sales exemption or inside sales exemption under California law. If the employee meets one of these exemptions, it only means the employee is not entitled to overtime pay – all other wage and hour laws still apply. 

Outside Sales Exemption

To qualify for the outside sales exemption, as the name implies, the employee must work outside of the office for more than 50% of their working time. 

Inside Sales Exemption

To qualify for the inside sales exemption, the employee must (1) earn more than one-and-one-half times the minimum wage (as of November 2008 the minimum wage is $8.00/hr in California) and (2) more than one-half of the employee’s compensation is from commissions. Employers have to be careful because there is no equivalent exemption to the inside sales exemption under Federal law –and even though an employee may qualify to be exempt under California law for overtime, they still may have to pay overtime under Federal law. 

It is possible that the employee may qualify for another exemption, such as professional, administrative, or executive, but the two exemptions discuss above most often apply to sales personnel.

Mistake: Making illegal deductions from the employee’s pay for orders that were cancelled.

There have been several court decisions that significantly restrict an employer’s ability to take an offset against an employee’s wages.  Cases have held that employers may not make deductions from employees’ commissions when the customer returns the sold items under certain circumstances. Also, another case held that the requirement that the employee make a “balloon payment” for the entire remaining balance of outstanding loan owed to the employer when the employee leaves employment is an unlawful deduction – even where the employee authorized such payment in writing. Finally, another case held that it was unlawful for employers to deduct from an employee’s current payroll for past salary advances that were in error. As these cases illustrate, employers need to be very careful when deducting from an employee’s pay. Even though the deduction may seem innocent, it could possibly violate California law.