Employers who pay employees commissions should evaluate their compensation schemes to ensure compliance with California law in light of the California Court of Appeals’ recent ruling in Vaquero, et al. v. Stoneledge Furniture, LLC. In Vaquero, the court of appeals held that employers who pay employees on a commission basis must pay employees a separate minimum wage for rest periods. Paying employees purely on draw and commission is no longer sufficient, even if the average wage equals, or is in excess of, the statutorily required minimum wage.

Ricardo Bermudez Vaquero and Robert Schaefer worked as sales associates for a retail furniture company doing business in California as Ashley Furniture HomeStores. The company paid the employees on a commission basis. According to the company’s commission compensation pay agreement, if a sales associate failed to earn minimum pay of at least $12.01 per hour[1] in commissions during any pay period, the company would pay the employee a draw against future advanced commissions. However, in no event would an employee be paid less than the California minimum wage for every hour worked. The company paid all sales associates for all hours worked, and the company instructed all associates to clock in at the start of each shift and then out and back in for meal periods and finally out again at the end of their shift. Sales associates did not clock out for rest periods and therefore received the company’s minimum pay for any rest periods taken.

After the company terminated Vaquero and Schaefer’s employment, the two former associates filed a putative class action against the company, claiming that the company failed to provide paid rest periods in accordance with California Labor Code § 226.7 and the applicable wage order, failed to pay all wages owed upon termination under § 203, and committed unfair business practices in doing so. The company moved for summary judgment, arguing that the rest period claim failed as a matter of law because the company paid its sales associates a guaranteed minimum for all hours worked, including rest periods. The trial court granted the company’s motion and entered judgment for the company. The court found that the company’s payment system specifically accounted for all hours worked and guaranteed that all sales associates would be paid $12.01 for each of those hours. In addition, “By tracking all the hours that its sales associates and employees were present at the facility, including rest periods, [the company] was able to ensure that the compensation it paid its employees via commission would never fail to include payment for the time employees spent taking their mandatory rest periods.” Without examining the remaining claims, the court concluded that they all failed because they were derivative of the rest period claim. The former sales associates appealed.

Noting that state wage and hour laws should be liberally construed in favor of protecting workers, the California Court of Appeals for the Second Appellate District reversed. The court explained that the California wage orders (and, as applicable here, Wage Order No. 7) require that employers count “rest period time” as “hours worked for which there shall be no deduction from wages,” and this language has been interpreted by California courts as requiring employers to “‘separately compensate’ employees for rest periods where the employer uses an ‘activity based compensation system’,” such as a commission-based payment scheme, that does not directly compensate for rest periods. In other words, employers may not comply with rest period obligations by providing higher piece-rate or commission pay because such payment schemes effectively “average pay to comply with the minimum wage law instead of separately compensating employees for their rest periods at the minimum or contractual hourly rate.” Employers must instead separately compensate employees for rest periods at the required minimum wage or contractual rate. After all, an employee who is paid by the piece or a commission cannot add to their wage during rest breaks, and compensation plans that do not compensate employees directly for rest periods undermine the protective policy by discouraging employees from taking rest breaks.

Employers who pay their employees commissions should immediately review their commission compensation plans to ensure compliance. Failure to pay employees directly for each rest period could result in substantial liability. “If an employer fails to provide an employee a meal or rest or recovery period in accordance with a state law . . . the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided.” Cal. Lab. Code § 226.7(c). These premiums can add up quickly for large employers and provide plaintiffs’ attorneys with a prime opportunity for costly class action litigation.