Spring is in the air, but California doesn’t appear to be looking for growth in its business sector. On February, 28, 2017, in Vaquero v. Stoneledge Furniture, a California appellate court decided in a class action case that if an employer pays employees by commission (not including outside salespersons), in addition to paying the commissions owed, it must also separately account and pay for rest periods and other non-productive time. As discussed below, it’s unclear from the strict wording of the case whether the court’s ruling affects all commissioned inside employees, or just those whose base pay is credited against commissions.
In the Vaquero case, the company paid its sales associates on a commission basis. If a sales associate failed to earn "Minimum Pay" of at least $12.01 per hour in commissions, in any pay period, the company paid the associate a “draw” against “future Advanced Commissions.” The commission agreement explained, “The 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.”
Although the company initially prevailed at the trial court level on a motion for summary judgment, the employees appealed, asking the appellate court to rule on two issues:
Unfortunately, the appellate court sided with the plaintiff class, answering “yes” to both questions. The court determined that the company’s “commission agreement did not provide separate compensation for any non-selling time, such as time spent in meetings, on certain types of training, and during rest periods. This is because, according to the court, “the formula it used for determining commissions did not include any component that directly compensated sales associates for rest periods.” Rather, “when Stoneledge paid an employee only a commission, that commission did not account for rest periods. When Stoneledge compensated an employee on an hourly basis (including for rest periods), the company took back that compensation in later pay periods. In neither situation was the employee separately compensated for rest periods.” Based on that reasoning, the court concluded that “The commission agreement used by Stoneledge during the class period is analytically indistinguishable from a piece-rate system in that neither allows employees to earn wages during rest periods. Indeed, the purpose of a rest period is to rest, not to work The court said that the trial court “improperly discount[ed] the language of Wage Order No. 7,” which counts rest periods as “hours worked” and requires compensation for those hours even though rest periods are, admittedly and by design, non-productive.
The court was careful to note, however, that, “Our conclusion does not cast doubt on the legality of commission-based compensation. Instead, we hold only that such compensation plans must separately account and pay for rest periods to comply with California law.” Based on this holding, the appellate court reversed the trial court’s ruling and remanded the case back to the trial court, directing the lower court to "rule on the merits of Stoneledge's motion for summary adjudication on the plaintiffs' other causes of action."
Although the court did not specify the separate rate at which an employer would need to pay rest periods and other non-productive time, we believe that future case decisions will apply the same standards that have previously been applied in the piece-rate legislation and cases – i.e., that the rate of compensation for rest and recovery periods shall be the higher of:
Also, other “non-productive time” shall be compensated “at an hourly rate that is no less than the applicable minimum wage.” Note that rest periods, recovery periods, and other non-productive time must be accounted and paid for separate and apart from any commission compensation.
The message is clear – if your company utilizes a system of compensation tied to an employees’ production, meaning something other than a straight hourly wage for all hours worked, your company must separately account for and compensate employees for their rest periods, recovery periods, and any other non-productive time.
What is unclear from the published opinion is whether an employer can avoid this rest break pay issue entirely by: 1) paying a guaranteed straight hourly rate for all hours worked, indicating that employees are paid for all non-productive time; and 2) separately, and above the guaranteed hourly rate, paying the commission or bonus based on production. This case will likely be appealed to the California Supreme Court and may be on hold if that occurs, but employers should take a hard look at their commission employee pay practices on this (as well as on related issues, such as overtime for commissioned inside sales employees).
Rest break violations (among other wage and hour issues) can result in financially staggering damages and penalties. In view of the Court's decision in this case, employers can expect a significant increase in individual and class action litigation brought by plaintiffs’ attorneys looking to exploit existing policies and practices that may arguably run afoul of the Court's ruling. We strongly encourage employers to promptly review their commission agreements, rest break policies, and payroll practices with employment law counsel to ensure compliance with this decision and minimize the risk of costly disputes.
For assistance with updating your commission agreements or rest break policies and practices for 2017, or questions regarding any other employment law matter, contact the attorneys at LightGabler.