California Law on Paying Salespeople Their Expenses, Overtime and Commission
|Prepared By: Melissa C. Marsh, Los Angeles Employment Attorney
Written: November 2008 - Last Updated: March 2016
Over the years, the law has been much more complicated with respect to paying commissioned salespeople. This article will set forth the California Labor Code requirements for the payment of business related expenses, overtime, and commissions.
California Commissioned Salespeople and Their Unreimbursed Expenses.
Pursuant to California Labor Code §2802, California employers are required to reimburse their employees for all "necessary expenditures... incurred by the employee in direct consequence of the discharge of his or her duties..." This includes sales associates whose primary compensation is commission based. Pursuant to the California Labor Code employers are prohibited from deducting such necessary business related expenses from the employee's compensation. Commonly reimbursed business related expenses incurred by sales persons include:
- training and seminar costs
- mileage or all related car expenses
- cell phone expenses
- telephone charges
- postage and other office supply expenses
- advertising costs
- business lunches
- costs associated with transaction errors; and
- costs to settle disputes with customers
If an employer fails to reimburse the employee, the employer may be held responsible for the employee's out-of-pocket costs plus interest from the date the employee incurred the expense as well as the employee's attorneys fees and costs to collect the unreimbursed expenses. California Employers should note that if an employee must use their vehicle to perform work related tasks, the employer must reimburse the employee for either their actual expenses incurred including gas, depreciation and wear and tear on their vehicle, or at the IRS standard mileage rate which is reset at least annually (.54 cents per mile in 2016).
Beginning January 1, 2016, the standard IRS mileage rate for business use of a vehicle is decreased to 54 cents per mile. For 2015, the standard IRS mileage rate for business use of a vehicle was 57.5 cents per mile.
California Commissioned Salespeople and Unpaid Overtime.
Oftentimes employers misclassify certain commission based sales people as exempt from overtime pay. First, it should be noted that California law makes a distinction between outside salespersons and inside salesperson, when making a determination as to whether the sales person is exempt from overtime pay. These parameters are set forth below. That said, in addition to the requirements set forth below, the California commissioned salesperson overtime pay exemption requires that such employees earn more than 1.5 times the California minimum wage for all hours worked during each pay period, with over half that amount representing commissions. As a result of the new minimum wage increase from $9 per hour to $10 per hour, for a commissioned salesperson in California to be exempt from overtime pay, they must not only comply with the requirements below, but they must also earn at least $15.01 per each hour worked (up from $13.51).
An outside salesperson in California is exempt from overtime pay if ALL of the following conditions are met:
- the salesperson earns at least $15.01 per each hour worked (2016); AND
- the salesperson is age 18 or older; AND
- the salesperson's primary duty is to make “sales,” or obtain orders, or to obtain contracts for services; AND
- the salesperson spends more than 50% of their working time away from the Employer's place of business "selling" or obtaining orders or contracts for products, services or use of facilities at potential customer's establishments.
It should be noted that pursuant to California law "outside sales activities" does not include:
- time spent making sales by mail, telephone or the Internet;
- time spent at a home office, or some other fixed location, as a headquarters from which to make calls; or
- time spent making incidental deliveries, providing maintenance or repair services, or engaging in collection activities.
Consequently, employees who primarily engage in sales activities by mail, telephone, or the internet (even from home) are not engaged in what California law deems "outside sales activities" and therefore to be exempt from overtime must meet the standards set forth for "inside salespersons."
An inside salesperson in California is exempt from overtime compensation only if:
- the salesperson earns at least $15.01 per each hour worked (2016);
- the salesperson is employed in either the "mercantile industry" (covered by Industrial Wage Order 7) or in a "professional, technical, clerical, mechanical and similar occupations" (covered by Industrial Wage Order 4); AND
- the salesperson's primary duty is to make “sales,” or obtain orders, or to obtain contracts for services; AND
- the salesperson’s regular rate of pay exceeds one and one-half times the applicable minimum wage; AND
- more than 50% of the salesperson's compensation in each pay period represents commissions from a bona-fide commission structure.
Did you know that inside sales people selling the same exact product for two different types of companies may be exempt from overtime pay at one business, and not exempt from overtime pay at another business? Well, that is true. In California, inside salespersons working for a manufacturing company (Wage Order 1), a business that provides personal-services (Wage Order 2), a hotel, housekeeping, or hospitality business (Wage Order 5) or a company in the transportation industry (Wage Order 9) are NOT exempt from overtime pay. Overtime must be paid to inside salespersons working for companies in these industries, and commissions paid must be taken into account when determining the employee’s regular rate of pay from which overtime is calculated.
Inside salespersons are exempt from overtime pay under Industrial Wage Order Nos. 4 (Professional, Technical, Clerical, Mechanical, and Similar Occupations) and 7 (Mercantile Industry) IF: (a) the employee is “principally” involved in selling (not making) a product or service for a company governed by the applicable Industrial Wage Order; (b) The employee’s “earnings exceed one and one-half (1 ½) times the minimum wage” and (c) “more than half of the employee’s compensation represents commissions.” Under current law, an employee must earn at least $15.01 per hour (2016) for each hour worked and the employee’s “commissions” must account for at least 51% of the employee’s wages.
To determine if your inside sales employees are covered under an overtime pay exemption, the employer must first determine if its business is governed by either Wage Order No. 4, or Wage Order No. 7. For example, retail stores are governed by Wage Order No. 4 (Mercantile Industry) and therefore if the employer principally operates a retail store, the commissioned inside salespeople hired to sell the employer’s clothing may be exempt from overtime pay under Wage Order No. 4. That same inside sales employee, if employed by an employer who principally operates a warehouse and for extra income employs inside salespeople to sell goods stored in the warehouse would not be exempt from overtime pay. The warehouse employer is governed under Industrial Wage Order No. 9 and therefore their salespeople would NOT be exempt from overtime pay even if all of the other conditions are met.
The "Mercantile Industry" means any industry, business, or establishment operated for the purpose of purchasing, selling, or distributing goods or commodities at wholesale or retail; or for the purpose of renting goods or commodities. Examples include retail stores, wholesale distributors, auto dealerships, and leasing companies.
The "Professional, Technical, Clerical, Mechanical, and Similar Occupations" includes professional, semiprofessional, managerial, supervisorial, laboratory, research, technical, clerical, office work, and mechanical occupations”… [including]: accountants; agents; appraisers; artists; attendants; audio-visual technicians; bookkeepers; bundlers; billposters; canvassers; carriers; cashiers; checkers; clerks; collectors; communications and sound technicians; compilers; copy holders; copy readers; copy writers; computer programmers and operators; demonstrators and display representatives; dispatchers; distributors; door-keepers; drafters; elevator operators; estimators; editors; graphic arts technicians; guards; guides; hosts; inspectors; installers; instructors; interviewers; investigators; librarians; laboratory workers; machine operators; mechanics; mailers; messengers; medical and dental technicians and technologists; models; nurses; packagers; photographers; porters and cleaners; process servers; printers; proof readers; salespersons and sales agents; secretaries; sign erectors; sign painters; social workers; solicitors; statisticians; stenographers; teachers; telephone, radio-telephone, telegraph and call-out operators; tellers; ticket agents; tracers; typists; vehicle operators; x-ray technicians; their assistants and other related occupations listed as professional, semiprofessional, technical, clerical, mechanical, and kindred occupations.”
At the federal level there have also been some interesting developments that have carved out various activities that do not exempt highly compensated commissioned employees from overtime.
Drug Reps. In In re Novartis Wage and Hour Litigation, the Second Circuit determined that pharmaceutical representatives (a.k.a. "drug reps") are NOT exempt from overtime under the "outside sales exemption" because they cannot close a sale. According to the second circuit court, if a sales representative merely provides information, or promotes demand, but cannot close a deal, or "obtain commitments to buy," then that employee is not engaging in "sales" and does not qualify for the sales based overtime exemption. In the instant case, the drug reps also did not qualify for the administrative exemption from overtime because the drug reps had no authority to make any important administrative decisions.
Loan Officers. On March 24, 2010, the Department Of Labor (DOL) issued Administrator's Interpretation No. 2010-1, under which it concluded that all financial service workers (loan officers, originators, consultants, etc..) may be entitled to overtime pay and are NOT exempt from overtime pay under the "sales" exemption. According to the DOL, if an employee collects and enters financial information, assesses or identifies particular loan products, and compiles customer documents for forwarding to either an underwriter or loan processor, they the employee is engaged in production work, not sales. Consequently, mortgage loan officers are NOT exempt from overtime and are entitled to overtime pay.
Insurance Claims Adjusters. At this time, whether an Insurance claim adjuster is exempt from overtime under the administrative exemption remains unsettled. Harris v. Superior Court, 53 Cal. 4th 170 (2011), the California Supreme Court's ruling mandates that a trier of fact (judge or jury) analyze the specific facts of a case before determining whether or not an employee’s work falls within the administrative exemption from overtime. The answer will depend on the claims managers' level of decision-making authority and discretion.
What Constitutes Commissions – Is a Bonus Really a Commission?
What constitutes a commission is determined by California Labor Code Sections 2751 and 204.1. Labor Code section 2751 uses the definition for commissions as Labor Code Section 204.1, which defines “commission wages” as “compensation paid to any person for services rendered in the sale of the employer’s property or services and based proportionately upon the amount or value thereof.” For a payment to be a commission it must: (1) the employee must spend at least 51% of his or her time selling a qualified product, or service, and (2) the payment must be a percentage of the sale’s price for an item or service, based on the amount or number of items / services sold by the employee, or based on some other formula, including net profits, if based in part on the employee’s sales. Employees and Employers beware calling a payment a bonus and setting up a bonus program that reward employees for increasing revenues may be deemed considered “commissions.” See, Areso v. Carmax, Inc., 195 Cal.App.4th 996 (2011) and Muldrow v. Surrex Solutions Corp., 208 Cal.App.4th 1381 (2012) That said, The California’s Labor Commissioner’s stated position in its Enforcement Policies and Interpretations Manual, indicates that “[c]onsistent commission earnings below, at or near the draw, are indicative of a commission plan that is not bona fide.”
Commissioned Salespeople and the Payment of Commissions.
California Labor Code section 2751 requires that all California employees paid by in whole, or in part, commission must be provided a signed written contract stating how the commissions will be calculated and paid. While the law does not provide specifics, the contract should provide a formula for how the commission will be calculated, when the commission is earned, when the commission will be paid during employment, and in the event the employee is terminated or quits when the earned but unpaid commissions that cannot then be calculated will be paid. Similarly, California employers must be mindful in drafting their commission agreements to abide by other applicable state and federal laws governing overtime, chargebacks, reconciliations, and forfeiture. The employer is further required to get a signed acknowledgement that the employee received a copy of their contract. California Labor Code section 2751 specifically provides that commissions do not include bonuses and profit-sharing plans, but see above definition of “commission” because just calling a commission a bonus, will not make it so.
Although the California Labor Code does not provide an exact time when commissions are to be paid, the Department of Labor Standards and Enforcement (DLSE) position is that a commission must be paid in the pay period in which it is earned. California Labor Code §210 provides for a penalty of $100 per employee for each failure to pay as required and a penalty of $200 plus 25 percent of the amount unlawfully withheld for each subsequent violation, or any intentional or willful violation. Employees can also recover attorney fees and costs as well as interest at 10 percent per annum pursuant to Labor Code sections 218.5 and 218.6.
Upon termination, the employer must pay a commissioned salesperson his or her accrued base salary immediately and any earned and unpaid commissions prior to the date of termination within 72 hours of the termination date. If the employer fails to pay the earned unpaid commissions within 72 hours of the termination, the employee may bring a suit seeking treble damages. As for the payment of commissions on sales completed after termination, the Labor Commissioner's position is that the salesperson is entitled to a commission if he or she is the "procuring cause" of the transaction, unless a written employment contract states otherwise. Various court cases have awarded the former salesperson his or her commission, even when the sale was consummated 90 days after termination.
Employers who have instituted a charge back policy with their sales associates should be mindful that such a policy is only valid and legal if: (1) the charge back results from a commission that was advanced, not earned; (2) the charge back is deducted from future unpaid commissions, not the sales person's base salary; and (3) the compensation scheme is acknowledged and agreed to by the employee in writing. See, California Labor Code Sections 200, 221, 224 and See, Koehl v. Verio, 142 Cal.App.4th 1313 (2006).
In Koehl, a few former employees filed a class action lawsuit against Verio claiming that Verio's charge back compensation scheme violated California’s labor laws. Verio's charge back compensation scheme provided its sales staff with a base salary plus commissions. The commissions were deemed earned when Verio received payment from the customer, but Verio agreed in a written employment agreement to advance payment of the commission to its sales staff when the order was placed, subject to a charge back if the order was later cancelled (within a specified time). In the event of a cancellation, Verio would charge back (deduct) the advanced pre-paid commission from the employee's then pending commissions (not from the employee's base salary).
The California Court of Appeal affirmed the judgment in favor of Verio ruling that (1) advances of unearned commissions are not “wages” under Labor Code §221; and (2) charge backs resulting from advanced commissions may under Labor Code §221 and §224 be legally deducted from unpaid commissions (not base salary) if the charge back arrangement is expressly agreed to by the employee in a written contract. The appellate court further noted that even if the advanced commission payments were “wages,” an employer may still legally deduct them under Labor Code §224 if the deduction: (1) is authorized in writing; and (2) does not reduce the employee's standard wage (base salary).
In light of the appellate court's holding in Koehl, California employers who charge back advanced commissions from their employees should: (1) obtain each employee’s written acknowledgment and agreement to the chargeback arrangement; (2) only deduct advanced commissions from future unpaid commissions, not from the employee’s base pay; and (3) only apply a chargeback to the particular employee responsible for generating the sale, not from a group or team of employees.
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