In a recent blog post, we discussed how recent California judicial court decisions may erode the once-solid foundation of traditional incentive pay systems. Specifically, Armenta v. Osmose and Bluford v. Safeway held that while a piece rate compensated employees for their “productive time”—time spent actually working on piece-rate tasks—the piece rate did not compensate them for their “non-productive time”—time worked doing anything else.

The California Supreme Court has added to this line of cases in Peabody v. Time Warner Cable, Inc., where the timing of commission payments came under attack. In Peabody, the Supreme Court held that commission wages paid in one pay period cannot be attributed to earlier pay periods to satisfy minimum and overtime wage requirements.

The Pay Practice

The Plaintiff, Susan Peabody, worked for Time Warner as a commissioned sales person. She was paid biweekly, but only the final paycheck of the month contained her commissions. Her first paycheck, meanwhile, generally paid an hourly rate of less than 1.5 times the minimum wage for the hours worked during the pay period corresponding to that paycheck. 

Peabody filed a class action lawsuit against Time Warner, claiming that (1) she regularly worked overtime but did not receive overtime wages, and (2) she earned less than the minimum wage during those weeks in which she worked more than 48 hours.

Time Warner argued that (1) Peabody was exempt from overtime pay under the California Wage Order exemption for commissioned employees whose earnings exceed 1.5 times the California minimum wage and who earn more than one-half of their compensation in the form of commissions, and (2) Time Warner should be able to assign the commissions paid in one pay period to the earlier pay period to satisfy minimum and overtime wage requirements. 

The California Supreme Court Decision

When a federal district court court granted summary judgment for Time Warner, Peabody appealed to the Ninth Circuit. The Ninth Circuit, finding no controlling California precedent, asked the California Supreme Court to determine whether the timing of Peabody’s commission payments resulted in underpayment of minimum and overtime wages.

As an initial matter, the Supreme Court rejected Time Warner’s argument that it was permissible to use a monthly pay period for paying commissions; the Court reasoned that, except for employees subject to certain special exemptions, wages must be paid at least as often as semi-montly. Second, the Suprme Court held that commissions paid in one pay period could not be attributed to earlier pay periods to satisfy minimum and overtime wage requirements. The Supreme Court cited statutory construction principles that require it to construe statutes in a manner favorable to the employee.

Additionally, the Supreme Court cautioned employers against relying on federal law in establishing pay practices, as California law is often significantly more favorable to employees.

Workforce Solutions

In the wake of Peabody, employers with commissioned employees may want to review their current payroll practices to ensure that these employees are paid more than 1.5 times the California minimum wage during each pay period, to take advantage of the Wage Order overtime exemption for commissioned salespeople.  Peabody is also a further reminder that California employment law is peculiar: California employers should always be wary of the differences between federal and state law when establishing pay policies.