The California Court of Appeals for the Second Appellate District has issued a groundbreaking decision invalidating a commission-only plan that did not separately compensate non-exempt sales representatives for rest periods. The case is Vaquero et al v. Stoneledge Furniture LLC.

Plaintiffs Vaquero and Schaefer are two former sales associates at Stoneledge Furniture, a retail furniture company doing business in California as Ashley Furniture. They filed a class action alleging that Stoneledge’s commission pay plan did did not properly compensate them for non-selling time and rest periods under California law, which requires that they be paid minimum wage for “each hour worked.” Stoneledge’s commission pay plan paid sales associates in earned commissions and, if associates did not earn commissions in excess of at least $12.01 for every hour worked, they would receive a “draw” that would bring them up to $12.01 for every hour worked. The draw could be deducted from future commissions.

The commission plan did not provide separate compensation for non-selling time, such as time spent in meetings or rest periods. Stoneledge allowed employees to take a 10-minute rest period for every four hours worked or major fraction thereof, but there was no method by which these rest periods could be tracked or separately compensated.

After the plaintiffs filed suit, Stoneledge filed and won a motion for summary judgment. The company successfully argued that the rest period claim failed as a matter of law because Stoneledge paid its associates a guaranteed minimum for all hours worked, including rest periods. The lower court found that Stoneledge’s payment system “specifically accounted for all hours worked . . . and guaranteed that [sales associates] would be paid more than $12 an hour for those hours. With this system there was no possibility that the employee’s rest period time would not be captured in the total amount paid each pay period.”

However, the appeals court reversed, relying on the plain language of Wage Order 7 and citing two prior appeals court decisions: Armenta v. Osmose, Inc., and Bluford v. Safeway Stores, Inc. Wage Order 7 states that “authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages.”

Armenta concerned hourly employees who were paid only for “productive” hours and not for “nonproductive” work, such as travel from the office to a work site. The employees in Armenta sued for the failure to pay minimum wage under California law. The employer argued that it satisfied California’s minimum wage requirement because, dividing the employees’ compensation by the total number of hours worked (both productive and nonproductive), the employees still “averaged” more than minimum wage for all hours worked. The Armenta court held that the employer could not satisfy minimum wage obligations by “averaging,” but instead was required to pay minimum wage “for each hour worked.”

In Bluford, the appellate court interpreted Wage Order 7 to require separate compensation for rest periods where an employer uses an activity-based compensation system that does not directly compensate for rest periods. Bluford involved truck drivers who sued Safeway for failing to provide paid rest periods. Drivers were compensated using a piece rate that depended on a number of variables, including number of miles driven and type of work being performed. Safeway argued that it compensated for rest periods because such compensation was subsumed in its piece rate compensation system. The court in Bluford held that allowing employers like Safeway to account for rest periods indirectly by negotiating a higher piece rate violated the principles in Armenta.

Returning to the recent Vaquero decision, the appellate court concluded that Stoneledge’s commission-only system violated California law because, like the wage averaging in Armenta and the piece rate system in Bluford, it did not separately compensate employees for rest periods but rather subsumed that compensation in its commission system. The court further stated that “nothing about commission compensation plans justifies treating commissioned employees differently from other employees.” Rather, “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.” The court expressly rejected Stoneledge’s argument that commission sales were different because employees could earn commissions while not present.

Outside sales representatives who spend more than 50 percent of their time engaged in selling outside the employer’s place of business are exempt and thus protected from the holding in Vaquero. However, employers who compensate non-exempt California sales representatives with commission-only plans should carefully evaluate their plans and restructure their compensation systems to ensure that they are paying separately for rest periods.