California’s overtime pay exemption for commissioned employees (salespeople) is an exemption from overtime pay only. Unlike other exemptions from overtime pay, California employers must still adhere to all of the other requirements in the Industrial Wage Orders, including meal and rest breaks. As of January 1, 2013, employers who pay their employees a commission must also provide their employees with a written contract that sets forth the method by which the commission shall be computed and paid. That said, California employers with commissioned salespeople have a lot of work to do to ensure they are not running afoul of the overtime pay exemption requirements.

With California’s newly passed increases in the minimum wage, as well as the ever increasing local living wage passed in various cities within California, California employers must consistently review how they are compensating their commissioned salespeople. 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 (2016), for a commissioned salesperson in California to be exempt from overtime pay, they must earn at least $15.01 per each hour worked (up from $13.51) in 2016.

Not All Commissioned Salespersons Even if Paid $15.01 Per Hour Are Exempt From Overtime Pay.

Outside salespersons in California are exempt from overtime pay if they earn at least $15.01 per each hour worked AND spend more than half their working time out of the office making sales.

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 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 per hour 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; bill posters; 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.”

What Constitutes Commissions – Your Bonus Might Be Included?

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 should beware that calling a payment a bonus and setting up a bonus program that rewards employees for increasing revenues may be deemed considered "commissions." See, Areso v. Carmax, Inc., 195 Cal.App.4th 996 (2011) and see also, Muldrow v. Surrex Solutions Corp., 208 Cal.App.4th 1381 (2012). Employers should also be mindful of the California’s Labor Commissioner’s stated position on commission plans that provides earning at or near a stated or regular draw. The California Labor Commissioner's i>Enforcement Policies and Interpretations Manual, states that “[c]onsistent commission earnings below, at or near the draw, are indicative of a commission plan that is not bona fide.”