Why it matters

Are employees paid on commission entitled to separate compensation for rest periods mandated by state law, and if so, do employers who keep track of hours worked, including rest periods, violate this requirement by paying employees a guaranteed minimum hourly rate as an advance on commissions earned in later pay periods? A California appellate court recently answered both questions in the affirmative. A pair of sales associates filed suit against a furniture retailer, claiming that their commission plan violated state law. Paid exclusively through commissions, the associates were paid a "draw" against future commissions if they failed to earn at least $12.01 per hour during any pay period. Separate compensation was not provided for non-selling time, including rest periods. The appellate panel found that the commission plan violated state law because it failed to separately compensate the sales associates for the time they worked but could not earn commissions, reversing summary judgment in favor of the employer. A commission plan "must separately account and pay for rest periods to comply with California law," the court ruled.

Detailed discussion

After Ricardo Vaquero and Robert Schaefer were terminated, they filed suit against their former employer, Ashley Furniture HomeStores. The pair alleged that the store's parent company—Stoneledge Furniture LLC—violated California law with its commission plan. From 2009 through March 2014, Stoneledge compensated sales associates like Vaquero and Schaefer strictly on a commission basis. If an employee failed to earn at least $12.01 per hour in commissions in any pay period, Stoneledge paid the associate a draw against future commissions.

The commission agreement did not provide separate compensation for any non-selling time, such as time spent in meetings, on certain types of training and during rest periods. Stoneledge authorized and permitted sales associates to take rest periods of at least ten consecutive minutes for every four hours worked or major fraction thereof.

Stoneledge filed a motion for summary judgment, arguing that the rest period claim failed as a matter of law because the employer paid its sales associates a guaranteed minimum for all hours worked, including rest periods. A trial court judge agreed.

The plaintiffs appealed. They countered that payment for rest periods is mandated under two separate provisions of law: Wage Order 7-2001 and section 226.7 of the state Labor Code. Section 226.7 provides that employers "shall not" require employees to work during a meal or rest or recovery period mandated by law, while Wage Order 7 (applicable to the mercantile industry) establishes an employer's duty to pay such employees the minimum wage "for all hours worked."

Recognizing that state wage and hour laws "reflect the strong public policy favoring protection of workers' general welfare," the appellate court concluded that the law required Stoneledge to separately compensate its sales associates for rest periods.

"The plain language of Wage Order No. 7 requires employers to count 'rest period time' as 'hours worked for which there shall be no deduction from wages,'" the court wrote. "Wage Order 7 requires employers to separately compensate employees for rest periods if an employer's compensation plan does not already include a minimum hourly wage for such time."

This requirement applies equally to commissioned employees, employees paid by piece rate, or any other compensation system that does not separately account for rest breaks and other nonproductive time, the court said. "[N]othing about commission compensation plans justifies treating commissioned employees differently from other employees," the panel wrote, adding that "the purpose of a rest period is to rest, not to work."

Stoneledge argued that commission sales may continue through rest periods because commissions are routinely earned while employees are not present, including when they are on break. But it "makes no sense to assume that a commission-based employee who works 100 minutes per 40-hour work week longer than another employee—for example, by greeting new customers, following up with potential leads, or answering emails and phone calls related to pending orders—would not earn more in commissions than the employee who spent those same 100 minutes in a break room," the court said.

The court found support for its conclusion in the Division of Labor Standards Enforcement Policies and Interpretations Manual as well as public policy, which has "long viewed mandatory rest periods 'as part of the remedial worker protection framework,'" and so sacrosanct a right that it is unwaivable. "Compensation plans that do not compensate employees directly for rest periods undermine this protective policy by discouraging employees from taking rest breaks," the panel said.

As Stoneledge's plan did not separately compensate sales associates for rest periods, it violated state law, the court held. "The problem with Stoneledge's compensation system … is that the formula it used for determining commissions did not include any component that directly compensated sales associates for rest periods," the panel wrote. "Sales associates who were paid their commission received the same amount of compensation regardless of whether they took rest breaks."

When the employer paid an employee only a commission, that commission did not account for rest periods, and when Stoneledge compensated an employee on an hourly basis (including for rest periods), the company took back that compensation in later pay periods, the court explained. "In neither situation was the employee separately compensated for rest periods."

The court noted that its decision did not cast doubt on the legality of commission-based compensation. "Instead, we hold only that such compensation plans must separately account and pay for rest periods to comply with California law," the panel said. "Nor will our decision lead to hoards of lazy sales associates. The commission agreement in effect during the class period provided that a sales associate who failed to meet minimum sales expectations (which generated commissions well above the guaranteed minimum) was subject to disciplinary measures up to and including termination. Thus, employers like Stoneledge have methods to ensure that an employee's productivity does not suffer as a result of complying with California law by paying a minimum wage for rest periods."

To read the opinion in Vaquero v. Stoneledge Furniture LLC, click here.