Does California law require that an employee who is paid on a commission basis receive separate compensation for his or her rest periods?

This question was undecided until the recent decision of Vaquero v. Stoneledge (Feb. 28, 2017) B269657 ("Vaquero"), in which a California appellate court held the answer to be yes. The court held that an employer who compensates its employees by advancing a guaranteed minimum hourly rate on future earned commissions, and then claws back those advanced wages when an employee earns commissions above the hourly minimum pay established by the company, violates California’s rest break laws.

Summary of the Litigation

In Vaquero, the Plaintiffs, former sales associates of Stoneledge Furniture, LLC ("Stoneledge"), filed a class action lawsuit against Stoneledge. Vaquero alleged Stoneledge failed to provide rest periods pursuant to Labor Code section 226.7 and Wage Order 7. Stoneledge argued that it properly compensated its sales associates because it paid them a guaranteed minimum hourly wage for all hours worked, including rest periods. According to Stoneledge’s Compensation Agreement, employees could expect a "Minimum Pay" of at least $12.01 per hour. Although sales associates were guaranteed a minimum hourly wage regardless of their sales, 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." Thus, Stoneledge’s compensation policy allowed it to take back the wages it had advanced in later pay periods in which the employee earned commissions above the guaranteed minimum pay.

Stoneledge further argued that, with respect to rest periods, its employees were properly compensated because "all time during rest periods was recorded and paid as time worked identically with all other time…thus, Sales Associates [were] paid at least $12 per hour even if they made no sales at all." Further, Stoneledge argued that even though it deducted previous draws on commissions paid to its sales associates, "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. According to Stoneledge, the only logical conclusion was that employee rest breaks were paid. The trial court agreed with Stoneledge and granted summary judgment in Stoneledge’s favor. The appellate court disagreed and reversed the trial court.

In deciding whether Stoneledge violated California law, the Court of Appeal explained that "wage and hour claims are today governed by two complementary and occasionally overlapping sources of authority: the provisions of Labor Code, enacted by the Legislature, and a series of 18 wage orders, adopted by the IWC." The court looked to Wage Order 7, the wage order that governs persons employed in the mercantile industry, and Labor Code section 226.2 in determining whether Stoneledge’s compensation policy violated California law.

Court of Appeal Concludes That Wage Order 7 Holds that Rest Periods Cannot be Deducted From Commission-Based Wages.

Regarding rest periods, Wage Order 7 states:

"...Authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages."

(Cal. Code of Regs. tit. 8, § 11070, subd. 12(A)) (emphasis added).

The court noted that the plain language of Wage Order 7 requires employers to count "rest period time" as "hours worked for which there can be no deduction from wages." The court further opined that "[c]ompensation plans that do not compensate employees directly for rest periods undermine [California’s] protective policy [regarding rest periods] by discouraging employees from taking rest breaks."

In determining whether Wage Order 7 covered employees paid by commission, the court noted that a prior case, Bluford v. Safeway Stores, Inc. (2013) 216 Cal.App.4th 864 ("Bluford"), "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 872.) While Bluford did not involve commission based employees, but rather piece-rate truck drivers, the Vaquero court found that this was a distinction without a difference.

Court Concludes That Labor Code section 226.2 Applies to Commission-Based Employees.

Stoneledge also argued that Wage Order 7 could not apply to commission based employees because Labor Code section 226.2, which requires employers to compensate piece-rate employees for rest, recovery, and other nonproductive time, does not apply to commissioned employees. The court disagreed and noted that "[n]othing in section 226.2. . . suggests that the Legislature intended to adopt a different rule for commission-based employees or to nullify the plain language of Wage Order No. 7." The court concluded that Section 226.2 covers commissioned employees, not just piece-rate employees, and mandates separately compensated rest breaks.

Court Holds Stoneledge’s Compensation Agreement Did Not Adequately Compensate Commission-Based Employees for Rest Periods.

The Vaquero court concluded that Stoneledge did not properly compensate rest breaks for sales associates who earned a commission instead of the guaranteed minimum pay of $12.01 per hour. The court explained:

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.

Under the court’s analysis, Stoneledge’s compensation policy violated California’ rest break laws because it compensated its sales associates on an hourly basis (including rest breaks), but could take back that compensation at a later date if an employee earned a commission above the minimum pay of $12.01. This, the court held, was improper.

Conclusion

While Vaquero is a matter of first impression and may be subject to further review, employers utilizing commission based compensation models will need to ensure their system complies with Vaquero until there is further guidance from the courts or Legislature, or both. Employers with commission based compensation are likely to see an uptick in litigation and face increased scrutiny based on Vaquero.

Employers with questions regarding the business implications of this case or about implementing a commission based compensation plan that complies with Vaquero may contact the authors or their usual employment counsel at AALRR.