In California, certain commissioned salespersons may be properly classified as exempt from overtime. To qualify, the employee must be paid on a commission basis, in addition to other requirements. State law defines "commissions" as wages based "proportionately upon the amount or value" of property or services sold by the salesperson. In Harris v. Investor's Business Daily (2006), a California state court held that employees paid on a point system based on the number of newspaper subscriptions sold were not paid on a commission basis, as the point values were not proportionately tied to the subscription price.
However, in Areso v. Carmax, a California court of appeal recently approved a commission plan that paid car salespersons a uniform amount of $150 for the sale of each automobile, and thereby upheld the exempt status of the salespersons. The employer justified the flat payment to avoid having its sales staff push higher priced vehicles to maximize their own commissions. Rejecting the plaintiffs' argument that the flat payment was akin to the point system struck down in Harris, the court ruled that the flat payment was proportional to the number of vehicles sold, albeit a "one to one proportion," and therefore a "commission" under California law. The court explained that the compensation was proportional because the salesperson's "compensation will rise and fall in direct proportion to the number of vehicles sold."
It is difficult to reconcile the court's explanation of commissions in Areso with the holding in Harris. Stay tuned for needed clarification by the California Supreme Court. In the meantime, employers should carefully evaluate whether their sales commission plans afford employees a lawful "commission" under California law as to support exempt status.