California Employees Paid on Commission Must Be Paid Separately for Rest Breaks

A California court recently held that employees paid by commission must be separately paid for their rest breaks. The employer had a policy of paying furniture sales employees a guaranteed minimum hourly rate as a draw against commissions. The draw was then deducted from later earned commissions, and the employee was always paid at least the minimum wage for all hours worked. Two former sales associates filed a class action against the employer, claiming that the company’s failure to separately compensate them for rest breaks amounted to an illegal deduction from wages, and, thus, violated the California Labor Code and IWC Wage Orders.

The trial court ruled that the policy was fully compliant because rest breaks were counted as hours worked, and the employer paid employees either (1) the minimum hourly rate for all hours worked (including rest break time), or (2) earned commissions, whichever was greater.

The Court of Appeal disagreed. Relying on past holdings that piece-rate workers must be paid separately for rest breaks, the court held that employees paid on commission are also covered by the Wage Order requirement that “rest period time shall be counted as hours worked for which there shall be no deduction from wages.” The court concluded that the need to separately compensate employees for rest periods “applies equally to commissioned employees, employees paid by piece rate, or any other compensation system that does not separately account for rest breaks and other non-productive time.”

The employer argued that because the recent enactment of Labor Code § 226.2 only requires employers to compensate piece rate workers for rest, recovery and other nonproductive time, the Legislature intended to exempt employees paid on commissions from Wage Order 7. But, the Court of Appeal was unpersuaded: “The fact that the Legislature ‘could have drafted [section 226.2] to include both… piece-rate and commission plans’…indicates nothing about the Legislature’s intent with regard to commission plans, and we decline to imply any such intent.” As a result, California employers that have other forms of productivity-based compensation plans are now at serious risk if those plans do not provide for separate compensation for rest breaks.

Advice to employers that have California employees who are paid on commission:

• Separately Pay At Least Minimum Wage for Rest Breaks: Review commission-based pay plans and agreements to ensure that commissioned employees are paid at least the minimum wage for rest break time.
• Don’t Inadvertently Deduct Rest Break Pay Using A Draw: Confirm that compensation for rest break time is not subject to a draw against commissions. Consider paying employees a guaranteed minimum wage for all hours worked, with potential additional commission.  The guaranteed minimum wage for all hours worked will cover payment for rest breaks and avoid the problem of the draw being viewed as a deduction from commissions.   
• Make Rest Break Pay a Separate Line-Item in the Pay Statement: Identify the rest period time pay as a separate line-item in wage statements.