Laura Reathaford and Benjamin Stockman
Laura Reathaford is a partner in Venable's Labor and Employment Group. She focuses her practice on management-side employment litigation, with an emphasis on wage and hour collective and class actions, including representative actions under the Private Attorney General Act (PAGA). In addition to defending employers in high-stakes litigation matters, Laura regularly advises clients on employment issues including terminating employees, drafting employee handbooks, and complying with wage and hour laws, as well as leave and disability rules.
Benjamin Stockman is an associate in Venable's Labor and Employment Group. His practice is focused on a broad range of matters involving wage and hour law, employment discrimination, equal pay law, family and medical leave law, disability law, employee discipline and termination, and traditional labor matters, including defending companies in proceedings before the National Labor Relations Board.
Employers have paid salespeople by commission for centuries.1 Commission pay is popular because it attempts to align the interests of employers and employees in a "win-win" compensation relationship.2 Companies also like commission-based pay plans because the success of salespeople is easy to track with little supervision.3 Studies have shown that salespeople generally are more tolerant of risk and favor a compensation arrangement that rewards success with a potential financial upside.4
Despite the historical popularity of commission pay, there appears to be a surge of litigation in California targeting employers who pay employees a commission. Several decisions in recent years have complicated life for employers who attempt to navigate California's complex wage and hour laws. For instance, as most California employers are probably aware, they must provide nonexempt employees with a ten-minute rest break for every four hours of work or every major fraction thereof.5 Employees must also receive compensation for this time even though they technically are not working.6
In Vaquero v. Stoneledge Furniture, LLC, a California appellate court ruled that employees paid by commission must be separately compensated for their rest breaks— even if they are guaranteed the minimum wage for all hours worked.7 Under Stoneledge's commission agreements, sales employees were paid on a commission basis.8 If an employee failed to earn an amount of commission equal to at least $12.01 per hour for time worked, then Stoneledge "topped up" the employee's commissions to cover the difference.9 If in subsequent pay periods the employee earned commissions in excess of $12.01 per hour, Stoneledge charged back the amount it had topped up in the prior pay periods.10 However, the commission agreements expressly stated that repayment would not be taken if it would result in earnings of less than $12.01 per hour for all hours worked in any week.11 In other words, employees were always paid at least $12.01 per hour for all hours worked, including all time spent on rest breaks.12 The trial court granted Stoneledge summary judgment, finding that Stoneledge's commission arrangement and minimum pay threshold guaranteed that employees' rest periods were compensated at least at $12.01 per hour.13 The appellate court disagreed, finding that the recoupment of the draw from future commissions effectively nullified the hourly pay, which is the only way employees can be paid for rest breaks.14
The Stoneledge court acknowledged that California law requires separate compensation for rest breaks only if the compensation agreement does not include minimum hourly wages.15 Had Stoneledge simply paid its salespeople this hourly rate regardless of commissions earned, presumably it would not have violated the rest break rule.16 According to the court, the problem with Stoneledge's commission agreement was twofold: first, the court believed that the charge-back provision effectively nullified the minimum hourly wage guarantee; and secondly, the court found that it was impossible to determine whether employees earning commission only (i.e., those with sales commissions totaling more than the minimum hourly rate) were compensated for rest breaks.17
[Page 12]
Curiously, in a prior decision from 2005, this same appellate court had lauded commission pay systems as a long-standing and proper practice under...
