The California Supreme Court just made it harder to treat commissioned salespeople as exempt from overtime and other wage and hour requirements, at least those that are not outside salespersons. In order to meet the standard for exemption as an inside salesperson, employees must receive at least 50% of their compensation from commissions and earn a minimum of 1.5 times the minimum wage ($13.50 an hour). Outside salespersons do not have to meet these requirements, however.
In Peabody v. Time Warner Cable, an inside salesperson claimed she was non-exempt and therefore entitled to overtime because her base pay was less than the minimum, and she was only paid commissions once a month. The result was during one of the two pay periods, she earned less than the minimum compensation required.
Time Warner contended that her monthly commission earnings should be averaged over both pay periods during the month, which would put her above the minimum. The court disagreed. For purposes of determining whether the minimum compensation threshold has been met, according to the court, commissions can only be counted during the period they are paid.
Like Time Warner, many companies currently pay commissions monthly or even quarterly. While this decision does not expressly require commissions to be paid each pay period, it does make it much more difficult to treat inside salespeople as exempt.
What steps should your company take? First, audit your sales force to determine if any employees currently treated as exempt are inside rather than outside salespersons. If so, you have a few options for maintaining wage and hour compliance:
• You can make sure their base hourly rate, excluding commissions, is at least $13.50. Remember, if they are currently paid a salary, you must divide that amount by the number of hours they work each pay period to make sure they are above the minimum, or
• You can pay commissions each pay period to assure that the base rate plus commissions exceeds the minimum. If an employee does not earn commissions for that pay period, however, the company will have to make up the difference between the base rate and the minimum in order to maintain exemption, or
• You can convert the affected employees to non-exempt status and pay them overtime.