California Supreme Court Decides Commission Issue

A recent California Supreme ​Court ruling interprets how to apply a key test to determine whether a commissioned inside sales employee is exempt from overtime.

Commissioned inside sales representatives in California are entitled to earn overtime unless they meet specific exemption requirements. Under California law, a commissioned inside sales representative who is covered by Wage Order 4 or Wage Order 7 is exempt from overtime if:

  • The employee’s earnings exceed 1.5 times the state minimum wage; and
  • At least 50% of the person’s total compensation comes from commissions.

The California Supreme Court’s July 14 decision in Peabody v. Time Warner Cable Inc.​ interprets the first prong of the test: the compensation requirement.

The question before the court was whether, to meet this prong, an employer may attribute commission wages paid in one pay period to another pay period.

The unanimous answer from the court was “No”:

“[A]n 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. An employer may not satisfy the prong by reassigning wages from a different pay period.”

The case was brought by a Time Warner account executive who sold cable TV advertising. She argued that her biweekly paychecks included only an hourly wage and often did not exceed 1.5 times the minimum wage.

Time Warner argued that if you factored in the employee’s monthly commissions, the exemption’s minimum earnings prong was met. Time Warner argued that the commissions, which were paid on the final biweekly payday of each month, should be attributed to the weeks of the preceding month.

Although the decision sets new legal precedent in California, it is consistent with the earlier interpretation of the exemption by the Division of Labor Standards Enforcement.

Staff Contact: Gail Cecchettini Whaley​