Decision: The California Supreme Court recently issued a unanimous decision in Peabody v. Time Warner Cable, Inc., clarifying several issues regarding employer commission plans. Under Time Warner’s commission plan, employees had to meet three specified conditions to “earn” their commissions. Once earned, the commissions were paid in the last biweekly paycheck of each calendar month, in the month after the commission was earned: e.g., a commission earned in November was paid in the second paycheck for December.

The California Supreme Court found that Time Warner’s policy did not satisfy the commissioned sales exemption in California for two reasons.

First, the policy impermissibly allowed commissions to be paid only on a monthly basis. The Supreme Court held that commissions must be paid in the pay period in which they are earned.

Second, Time Warner’s policy impermissibly allowed it to attribute commission wages paid in one pay period to other pay periods for the purpose of satisfying the minimum earnings component of the commissioned employee exemption. (To fall within the commissioned sales exemption, employees must earn more than 1.5 times the state minimum wage, and more than half the employees’ income must come from commission.)

The Supreme Court explained that the minimum earnings requirement for the exemption must be calculated based on the amount of wages “actually paid during that pay period.” In other words, if the employee is not paid enough in a particular pay period to meet the minimum earnings threshold, the employer cannot apply the next pay period’s commission payment to the prior month’s shortfall. The employee would be a non-exempt employee for the shortfall month and eligible for overtime.

Impact:Peabody makes it more difficult for employers to meet the commissioned employee exemption. Employers should modify their commission payment practices to conform to the decision, including modifying their payment practices to ensure that they are paying employees at least $13.50 for every hour worked (1.5 times the $9 minimum wage) and that employees earn more than 50 percent of their wages from commission in every paycheck.