Why it matters: Employers in California that pay commission wages should familiarize themselves with a new decision from the California Supreme Court limiting payroll choices. Answering a question from the Ninth U.S. Circuit Court of Appeals, the state’s highest court held that employers may not attribute commission wages in one pay period to other periods in order to satisfy the state’s compensation requirements. The employer utilized a payment system of biweekly paychecks with hourly wages, paying commission wages approximately every other pay period. Taking a strict reading of the regulations, the court refused to allow the exemption to be satisfied by factoring in commission payments from other pay periods. “[W]e hold that an employer satisfies the minimum earnings prong of the commissioned employee exemption only in those pay periods in which it actually pays the required minimum earnings,” the court concluded. “An employer may not satisfy the prong by reassigning wages from a different pay period.”

Detailed Discussion

For less than one year, Susan Peabody was an account executive at Time Warner Cable, selling advertising on the company’s television channels. Every other week, Time Warner paid her $769.23 in hourly wages, or $9.61 per hour based on a 40-hour week. Approximately every other pay period, Peabody received commission wages.

After she stopped working for Time Warner, Peabody sued, alleging various wage and hour violations. She claimed that she regularly worked 45 or more hours per week but was never paid overtime wages; on weeks where she worked more than 48 hours, she received less than the minimum wages when she was paid only hourly wages.

Time Warner moved for summary judgment. Peabody fell within California’s “commissioned employee” exemption for overtime, the employer argued.

Wage Order No. 4 requires that an employee’s “earnings exceed one and one-half times the minimum wage” for the exemption to apply. While Time Warner acknowledged that most of Peabody’s paychecks included only hourly wages and were less than the statutory requirement, the company told the court that commissions should be reassigned from the pay periods in which they were paid to earlier pay periods and attributed to the monthly pay period for which they were earned, satisfying the minimum earnings requirement.

A federal district court agreed and Peabody appealed. Finding a lack of controlling precedent, the 9th Circuit certified the issue to the California Supreme Court.

Taking a strict reading of the Wage Order requirements, the court said commissioned employees must receive 1.5 times the minimum wage in each paycheck. The fact that Peabody earned more than $75,000 during her tenure at the company – more than compensating her for any alleged overtime, Time Warner said – was irrelevant.

“[A]ll earned wages, including commissions, must be paid no less frequently than semimonthly,” the court wrote. “Limited exceptions do exist, demonstrating that the Legislature knows how to establish a different payroll period when it wishes to do so.”

Time Warner’s monthly pay period for commission wages based on when the commission was earned was impermissible, the court said. “Whether the minimum earnings prong is satisfied depends on the amount of wages actually paid in a pay period,” the court said. “An employer may not attribute wages paid on one pay period to a prior pay period to cure a shortfall.”

This narrow construction of the exemption’s language was consistent with the minimum earnings requirement with “an eye toward protecting employees,” the court added. “Making employers actually pay the required minimum amount of wages in each pay period mitigates the burden imposed by exempting employees from receiving overtime. This purpose would be defeated if an employer could simply pay the minimum wage for all work performed, including excess labor, and then reassign commission wages paid weeks or months later in order to satisfy the exemption’s minimum earnings prong.”

Further, allowing employers to pay wages attributed to a different pay period would be inconsistent with other Labor Code provisions, including those requiring semimonthly paychecks with wages earned during that period, as well as the enforcement policies of the state’s Division of Labor Standards Enforcement, the court said.

Compliance with federal law – which Time Warner contended permitted the wage attribution it used – was insufficient. “Unlike state law, federal law does not require an employee to be paid semimonthly,” the court wrote. “It also permits employers to defer paying earned commissions so long as the employee is paid the minimum wage in each pay period. In light of these substantial differences from California law, reliance on federal authorities to construe state regulations would be misplaced.”

To read the opinion in Peabody v. Time Warner Cable, click here.