Ruling a recruiter was a commissioned salesperson because his job involved sales and his compensation was based on those sales, the California Court of Appeal, Fourth Appellate District, has rejected an employee’s claims for unpaid overtime and meal period premium pay against his employer on behalf of himself and a class of current and former employees.  Muldrow v. Surrex Solutions Corp., No. D057995 (Cal. App. 4th Dist. Aug. 29, 2012).  The Court found the employees were subject to California’s commissioned employee exemption and affirmed the judgment in favor of the employer.

This is the second time the Court has considered the case.  It issued its first decision on January 24, 2012.  However, the California Supreme Court granted the plaintiff’s petition for review and deferred further action pending its decision in Brinker Restaurant Corp. v. Superior Court, which it issued on April 12, 2012.  (In Brinker, the Supreme Court ruled that employers are required only to provide meal and rest periods to workers, not ensure that they were taken.)  The High Court subsequently transferred the case back to the appellate court with directions to vacate the earlier decision and to reconsider the case in light of Brinker. The Court of Appeal duly vacated its prior decision.  Upon reconsideration in light of Brinker, however, the Court concluded, “It is undisputed that Brinker does not affect our prior conclusion.”

Background

Tyrone Muldrow worked for Surrex Solutions Corporation as a “consulting services manager.”  He recruited candidates for employment positions with the company’s clients; his general job duties included account development, sales, account management, and recruiting.  Clients would place job orders with the company and a consulting services manager would search for potential candidates.  The company was paid only upon successfully placing a candidate.

A company executive described the recruiting process as follows:

We have to convince the candidate that they’re the right person, that this position is the right place for them.…We have to convince the client that this is the right person for them….[A]fter they’ve met, we need to debrief both the client and the candidate to make sure to pull it together.  Then we have to make sure…it all comes together.  It’s a very difficult sale.

The company paid its consulting services managers a draw ranging from approximately $3,000 to $5,500 per month against future commissions. Consulting services managers also received an amount in excess of the guaranteed draw when their lifetime commissions earned as of that pay period were greater than the lifetime draw payments as of that same date.  Muldrow’s annual income averaged between $270,000 and $300,000, an amount far in excess of his $60,000-per-year guaranteed draw.

Muldrow filed a class action against the company alleging, among other things, that it failed to pay overtime or provide meal and rest periods in violation of the California Labor Code. The trial court found Muldrow was an exempt commissioned employee not entitled to overtime pursuant to California Industrial Welfare Commission Wage Order No. 7-2001.  It also found in accordance with Brinker that the employer was required only to provide meal and rest periods, not ensure that they were taken. Muldrow appealed.  The Court of Appeal affirmed.

Applicable Law

Wage Order No. 7-2001 exempts from overtime “any employee whose earnings exceed one and one-half times the minimum wage if more than half of that employee’s compensation represents commissions.”  To determine whether an employee falls within this exemption, California courts examine whether the employee is involved principally in selling a product or service, and whether the amount of the employee’s compensation is a percent of the price of the product or service.  Keyes Motors, Inc. v. DLSE, 197 Cal. App. 3d 557, 563 (Cal. Ct. App. 1987).

Recruiter Engaged in Sales

Upon reconsideration, the Court again rejected Muldrow’s argument that he was not engaged in sales.  The Court unequivocally found, “reduced to its essence,” Muldrow’s job was to offer a candidate’s services to a client in exchange for a fee; this met “the ordinary definition of the word sell.” The Court also refused to interpret narrowly the meaning of commission to cover only arrangements where a salesperson receives a straight percentage of sales.  Finding that interpretation an “excessively narrow and wooden” reading of the Wage Order and applicable case law, the Court concluded that Muldrow’s compensation constituted a commission or “a payment base[d]…on sales that is decoupled from actual time worked.”

Finally, the Court rejected the contention that the company’s compensation plan was not bona fide, given that Muldrow’s annual income of approximately $300,000 far exceeded his $60,000-per-year guaranteed draw.  See DLSE Enforcement Policies and Interpretations Manual (June 2002) § 50.6.1(4) (“Consistent commission earnings below, at or near the draw are indicative of a commission plan that is not bona fide.”)

Written Commission Agreement

California Labor Code Section 2751 requires that by January 1, 2013, any contract providing for commission payments for an employee’s services to be rendered within California be in writing.  Further, the contract must specify the method by which the commissions are to be computed and paid. The employer must give a signed copy of the contract to every employee who is a party thereto and obtain a signed receipt for the contract from each employee. The law also repeals existing law making an employer that violates the statute liable in a civil action for triple damages.

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Muldrow v. Surrex is good news for employers in California, but whether an employee is a commissioned salesperson and exempt from overtime remains highly fact-sensitive.  In addition, the case could be appealed again to the California Supreme Court where the Court of Appeal decision could be de-published or accepted for review (meaning it could no longer be relied on as authority).  In light of Muldrow, employers should consider examining their incentive compensation plans under California law to determine if they provide for “commissions” and, if so, take immediate steps to comply with Labor Code Section 2751 by January 1st.

Meanwhile, in addition to state overtime laws, employers also must consider the federal Fair Labor Standards Act’s overtime provisions, which narrowly limit the exemption for inside commissioned sales employees to those in the retail or service industries, as defined under the FLSA.