Overtime: commission pay plans
STATE OF CALIFORNIA
GRAY DAVIS, Governor
DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT
Santa Rosa Legal Section
50 D Street, Suite 360
Santa Rosa, CA 95404
(707) 576-6788
H. THOMAS CADELL, Of Counsel
June 14, 2002
Adam C. Abrahams
Jackson Lewis Schnitzler & Krupman
725 South Figueroa Street, Suite 2500
Los Angeles, CA 90017-5408
Re: Commission Pay Plans And Overtime
Dear Mr. Abrahams:
This is in reply to your letter of March 5, 2002, directed to
Arthur Lujan, State Labor Commissioner, requesting DLSE's position
concerning an employer, subject to Wage Order 2, employing
commissioned inside salespersons. These salespersons receive a
monthly "base salary" greater than one and one-half times the
minimum wage (it is not clear why you mention this wage amount
unless you feel that the employees, covered by Order 2, may be
eligible for exemption under the commissioned sales exemption; that
would not be correct, however, because the exemption is limited to
workers covered by Orders 4 and 7 — we mention this only to
alleviate any misunderstanding) and are paid bi-monthly. In
addition to the base salary, the employees receive commissions paid
on a monthly basis.
We must admit, however, that the explanation of the commission
schedule is not clear to us.
Your first question is whether DLSE would find any issues with
the commission plan you describe. As stated, we can make no
determination on that point inasmuch as we don't have sufficient
facts to evaluate the plan. We assume that the "par" amount upon
which the commission depends is some objective figure and that the
calculation is not one which would fall within those prohibited by
such cases as Quillian v. Lion Oil (1979) 96 Cal.App.3d 156; 157
Cal.Rptr. 740, Kerr's Catering Service v. Department of Industrial
Relations (1962) 57 Cal.2d 319, 19 Cal.Rptr. 492, 369 P.2d 20, or
Hudgins v. Neiman Marcus (1995) 34 Cal.App.4th 1109. However, in
order to specifically opine on the plan, we must have all of the
facts.
Your second question asks whether the employer is required to
pay overtime to the salespersons when they work over eight hours in
a day and/or 40 hours in a workweek.
You do not indicate any type of exemption you may be relying
upon, and, quite frankly, we are at a loss to understand why
the question is asked? Obviously, unless there is some
exception to the rule, the employees must be paid the
appropriate premium for overtime.
As an adjunct to the second question, you ask what would
happen if the employees fail to report or attempt to conceal their
overtime (in the experience of the DLSE, the fact that California
law requires an employer to pay a premium for overtime actively
discourages employees from surreptitiously concealing the fact that
they have worked overtime)?
It is, of course, axiomatic that it is the employer's
obligation to keep accurate time records. (See Labor Code
§ 1174, IWC Orders, Section 7) In addition, the law requires
that the employee be paid for all hours the employee is
"engaged, suffered or permitted" to work. Consequently, it is
up to the employer to develop a system which accurately keeps
track of the hours worked by the employees.
Your third question asks whether the employer needs to include
the commissions when determining the regular rate of pay or can it
figure the regular rate based on the base salary?
The regular rate of pay under California law (as it is under
federal law) includes "all remuneration for employment paid
to, or on behalf of, the employee." (29 USC § 207 (e)) In
determining what payments are to be included in or excluded
from the calculation of the regular rate of pay, California
law adheres to the standards adopted by the United States
Department of Labor to the extent that those standards are
consistent with California law. This includes, of course, any
sum paid for hours worked or performing a duty (i.e., "on-
call" time, selling a product, etc.)
It has been the long-established enforcement policy of the
DLSE (which closely tracks the federal regulations in this
regard) to include such indirect wages as housing, meals, etc.
These sums are added to the cash wage paid for purposes of
determining the "regular rate" of pay. The federal courts
have addressed this issue and the U.S. Supreme Court in the
case of Walling v. Youngerman-Reynolds Hardwood Co (1945) 65
S.Ct. 1242, 1245 noted:
"The regular rate by its very nature must reflect all
payments which the parties have agreed shall be received
regularly during the workweek, exclusive of overtime
payments. It is not an arbitrary label chosen by the
parties; it is an actual fact. Once the parties have
decided upon the amount of wages and the mode of payment
the determination of the regular rate becomes a matter of
mathematical computation, the result of which is
unaffected by any designation of a contrary 'regular
rate' in the contracts." (See also, Walling v. Alaska
Pacific Consolidated Mining Co. (9th Cir.1945) 152 F.2d
812, 815)
Your third question asks: "If the employer needs to include
commissions, how would the employer determine the regular rate of
pay, especially in light of the fact that the commissions are
determined monthly?"
The method of calculating the regular rate for piece workers,
production bonus workers or commission workers has been
discussed in a number of Opinion Letters issued by the DLSE
(see O.L. 1993.02.22, 1993.02.22-1, 1988.06.15, 1988.03.28,
1994.06.17-1, 1988.07.14, 1987.02.17).
Either of the following two methods may be used to determine
the regular rate for purposes of computing overtime
compensation:
1. Compute the regular rate by dividing the total earnings
for the week, including earnings during overtime hours,
by the total hours worked during the week, including the
overtime hours. For each overtime hour worked, the
employee is entitled to an additional one-half the
regular rate for hours requiring time and one-half and to
an additional full rate for hours requiring double time.
This is the most commonly used method of calculation.
2. Using the piece or commission rate as the regular rate
and paying one and one-half this rate for production
during overtime hours. This method is rarely used.
It is recognized that the method outlined in alternative 1,
above, resembles the computation used in the illegal
fluctuating workweek plans. However, there is a distinct
difference: Under that federal fluctuating workweek method the
salaried employee is not given the opportunity to increase his
or her basic rate; in fact, it is always the case that the
longer the employee on a fluctuating workweek works, the lower
the basic hourly rate of the salaried employee becomes. Under
the DLSE method for piece workers, production bonus workers or
commission workers, it is recognized that these employees are
actually given additional time to make more pieces or earn
more commission in the overtime hours so that the basic hourly
rate may increase. Therefore, the Skyline analysis for
computing the regular rate of pay is inapplicable to computing
the regular rate for piece rate and commission employees. The
Skyline court recognized this at 165 Ca.App.3d 239, 254.
As an alternative, (see 2, above) piece work performed during
overtime periods may be paid by paying for each piece made
during the overtime period at the appropriate rate, i.e., time
and a half (1½) for 8 to 12 hours, or double time (2) over 12
hours.
In the situation you describe, the regular rate for the
commissions would be determined by dividing the total amount
received in commissions for the month by the total number of
hours worked in that month. The payment, however, would have
to be based on the weekly payroll, not the monthly payroll.
The overtime payment would have to compensate the employees at
the appropriate premium rate for the overtime hours worked.
Finally, you ask: "If the employer has not been properly
paying overtime, what process does the employer need to take to
make its policy conform and make its employees whole?
As you know, Order 2 has always required the payment of
overtime on a daily as well as a weekly basis. Consequently,
the payment of the overtime based on the commission income was
an obligation of the employer since 1980.
The employer must make the affected employees whole by paying
the past due overtime compensation. This would include
present as well as past employees. We have not been told
whether there is a written policy or agreement concerning this
commission program so we cannot comment on the length of the
statute of limitations which might be involved. We do note
that the payment of overtime, being a statutory obligation,
has a three-year statute of limitations even absent a written
contract or policy.
We hope this adequately addresses the issues you raised in
your letter of March 5, 2002. Please excuse the delay in respond
ing to your inquiry. However, the information we have furnished
herein is not new or unique; it has been the DLSE enforcement
policy since at least 1980.
Yours truly,
H. THOMAS CADELL, JR.
Attorney for the Labor Commissioner
c.c. Arthur Lujan, State Labor Commissioner
Tom Grogan, Chief Deputy Labor Commissioner
Anne Stevason, Acting Chief Counsel
Assistant Labor Commissioners
Regional Managers