California wage and hour laws provide that certain employees, such as executives, managers and administrative employees, are “exempt” and are not regulated by certain aspects of the Labor Code and the IWC Wage Orders, specifically in relation to overtime compensation.
In addition, certain employees in sales positions may be considered “exempt” from the overtime regulations if their compensation structure meets the California’s guidelines.
Wage Order 7-2001 exempts “commissioned employees” from overtime compensation if the employee’s earnings exceed one and one-half times the minimum wage, and more than half of the employee’s compensation represents commissions.
In conjunction with the requirements of the wage order, two additional requirements were established by the California Court of Appeal in Keyes Motors, Inc. v. DLSE many years ago to determine whether a compensation program qualifies as “commission wages” for exempt classifications. These requirements are:
(1) the employee must be involved “principally in selling a product or service, not making the product or rendering the service,” and
(2) the employee’s compensation “must be a percent of the price of the product or service.”
In a recent case before the California Court of Appeals two issues were presented on the concept of commissions for exempt status salespersons. (Muldrow v. Surrex Solutions Corp.)
Issue #1: What activities must a commissioned employee be engaged in to meet the criteria of being “principally involved in selling”.
In this case, the plaintiff, a recruiter, was compensated with a percentage of the profits paid by customers to the employer. He argued that he was mis-classified as “exempt” and that the majority of his duties did not include “selling” and that he was owed additional wages. The plaintiff argued that only the time spent finding new clients was time spent “selling” and the other aspects of the recruiter job , such as identifying and recruiting candidates, was not sales activity.
The Court disagreed and found that activities such as cold calling, searching and interviewing candidates and inputting data are all essential sales duties, relevant to determination that the employee is “principally engaged in selling” for purposes of the California commissioned employees exemption.
The Court found that these activities are “essential prerequisites necessary to accomplishing the sale, ” and thus, “sales-related activities.” Therefore, the court held that plaintiffs were employed “principally in selling a product or service.”
Issue #2: Did the compensation program comply with the “percent of the price of the product or service” requirement?
The Court stated that this criteria was not intended to limit employers to calculating commissions based strictly on a percentage of the price of the product or service. The Court found that the employer’s commission system fully comports with the “essence of a commission” in that it is a payment based on sales, without regard to actual time worked.
On this basis, the Court determined that the compensation system was sufficient to constitute a “commission” for purposes of the exemption because it was sufficiently related to the price of services sold.
What this means for employers is that when analyzing whether an employee is principally engaged in selling a product or service, for purposes of determining if the commissioned employee exemption applies, an employer may account for all activities that are “essential prerequisites necessary to accomplishing the sale.”
What Should I Do?
• Review any compensation systems for employees paid on a commission.
• Determine if their duties principally involve selling a produce or service.
• Ensure that their compensation meets both prongs of the Keyes Motors test.