In 2013, the California Court of Appeal ruled in Gonzales v. Downtown LA Motors, LP, that employees paid on a piece-rate basis were entitled to be paid at least the minimum wage for time spent performing tasks not compensated on a piece rate basis, in addition to the piece rate compensation for repair work.  The Gonzales court specifically declined, however, to address the question of whether employers are obligated to pay hourly wages during rest breaks to non-exempt employees generally paid on a piece rate basis, leaving that question to be addressed in future cases.  Last month, in Vaquero v. Stoneledge Furniture LLC, the Court of Appeal extended the reasoning of the Gonzales decision to employees paid on a commission basis or “any other compensation system that does not separately account for rest breaks and other nonproductive time.”

The Gonzales case involved mechanics paid on a piece rate basis for their work in repairing automobiles.  As is common in the auto repair industry, Downtown LA Motors credited its mechanics for a flat number of hours of work for performing a particular repair task, regardless of the actual time the mechanic spent performing the repair.  When not performing repairs, mechanics engaged in other work, such as attending meetings and cleaning their work stations.  Downtown LA Motors guaranteed that the mechanics’ average compensation for all hours worked would not fall below the minimum wage, but it did not pay the mechanics separately for the time spent performing the non-repair tasks not paid on a piece rate basis if their piece rate wages, divided by their total hours of work, matched or exceeded the minimum wage.  The appellate court held that the compensation plan represented illegal “pay averaging” and that the mechanics were entitled to be paid at least the minimum wage for time spent performing tasks not compensated on a piece rate basis, in addition to the piece rate compensation for repair work.

In Vaquero, the plaintiffs worked as sales associates and alleged that their compensation plan violated California law because it did not provide them with separate pay for rest breaks, which are considered paid time under California law.  The appellate court analyzed the language of the applicable Wage Order and relevant statutes before concluding that the Wage Order “requires employers to separately compensate employees for rest periods if an employer’s compensation plan does not already include a minimum hourly wage for such time.”  As a result, employees paid on a commission basis are entitled to be paid at least the minimum wage for time devoted to tasks that do not generate commissions, including rest breaks.

In the wake of the Vaquero decision, employers who pay employees on a commission basis should assure that they comply with the following rules in order to avoid potential liability:

  • Compensate employees separately for time spent performing tasks not paid on commission –  If employees perform some work that is paid on a commission basis and other tasks that cannot generate commission income, employers must pay the employees separately for the time spent performing the latter work.  In order to comply with this obligation, of course, employers must require employees paid on a commission basis to track and record the time they devote to tasks that cannot generate commission income.
     
  • Compensate commissioned employees separately for time spent on rest breaks – The Vaquero decision clearly requires employers to pay employees paid on a commission basis at least the minimum wage for time spent on rest breaks.  
     
  • Calculate overtime correctly for non-exempt employees who earn commissions – Non-exempt employees are generally entitled to overtime compensation if they work more than eight hours in a day or 40 hours in a week.   The calculation of overtime can become complicated when a non-exempt employee’s compensation includes both hourly wages and incentive compensation such as commissions.  A through explanation of overtime compensation is beyond the scope of this Advisory, but a non-exempt employee’s regular rate of pay (the rate used to calculate overtime) is generally equivalent to his or her total non-discretionary compensation for the week (excluding the overtime premium) divided by the total number of hours worked.

Many businesses pay some of their employees on a commission basis.  Although commission arrangements are often perceived as being simple and straightforward, the rules can be more complex when applied in many real-life scenarios.  If you have questions about the Vaquero decision, or any other issue relating to employment law, please contact one of our attorneys.