Calculating paid sick leave pay for commissioned and exempt employees

STATE OF CALIFORNIA
DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT
1515 Clay Street, Suite 801
Oakland, California 94612
(510) 622-3246
(510) 622-3258 fax

SUSAN A. DEVI
Staff Attorney

October 11, 2016

Lawrence S. Branton
Seltzer Caplan McMahon Vitek
750 B Street, Suite 2100
San Diego, CA 92101

Dear Mr. Branton:

Re: Healthy Workplace Healthy Families Act of 2014 - Calculating Payment of Paid Sick Leave - Exempt Non-Exempt Employees, Employees Paid by Commission

Your letter dated December 16, 2015, seeks clarification regarding which method of calculation for paid sick leave (PSL) as required by Labor Code section 246(k)(1); (2) & (3) should be used for employees paid by commissions and employees exempt from the payment of overtime. You ask whether an exempt employee who is paid almost entirely by commissions has to be paid a separate amount of PSL or whether amounts that an employee regularly receives in commissions which happen to be paid on a sick day would suffice. 1 Secondly, you ask for clarification regarding how to calculate PSL for an exempt employee who also receives an annual bonus at the end of each year.

Labor Code section 246(k) allows, as discussed below, an employer to pay PSL to an employee who is not exempt from overtime under the professional, administrative or executive exemption in one of two ways. The employer may calculate the regular rate of pay for the workweek in which the paid sick leave was taken (under (k)(1)) or the employer may calculate the total non-overtime earnings for the prior 90 days divided by the total hours for the prior 90 days (under (k)(2)) A non-exempt employee is paid based upon their total compensation which includes all forms of compensation (hourly, commissions, piece rate, incentive/performance bonuses).2

Answering your first question, computing the amount of PSL due to an employee who is paid almost entirely by commissions may be calculated by either method available under Labor Code

1
The Labor Commissioner addressed a similar question in an Opinion Letter dated May 14, 1987. In the May 14, 1987 Opinion Letter, the Labor Commissioner stated that previously earned commissions paid while an employee was off work on unpaid leave did not constitute vacation pay. Rather, the letter reasoned that the compensation was earned while working. It was simply paid while the employee was off on an unpaid leave. 2 For non -exempt employees paid by salary, the salary constitutes non-overtime pay. In calculating the regular rate under (k)(1), the salary is divided by non-overtime hours. When calculating total non-overtime earnings for the previous 90 days, the salary is divided by total non-overtime hours. Although the statute states that non-overtime pay should be divided by total hours under (k)(2) - that provision is only applicable when payment is made by commission, piece rate or bonus which require that total hours be used to calculate the regular rate of pay for the prior 90 days.

Letter to Mr. Branton
October 11, 2016
Page 2

section 246(k)(1) or (2). Labor Code section 246(k)(3) would not apply to an employee paid almost entirely by commissions because that employee is not as we understand your letter, earning a salary of at least two times the minimum wage in addition to commissions.

At the outset it is important to understand that generally an employee paid almost entirely by commissions is only exempt from overtime if one's earnings exceed one and one-half times the minimum wage and more than one half of all compensation represents commissions for each pay period pursuant to Labor Code Section 515(b) and Section 3(D) of the Industrial Welfare Commission Orders, or if the employee qualifies as an outside sales person under Labor Code Section 1171 (and Section 1 (C) of the Industrial Welfare Commission Orders. Under both instances, employees are commonly understood to be "exempt" from different aspects of minimum labor standards (overtime or minimum standards under the IWC Orders, respectively). These two exemptions are independent exemptions which apply separately from paid sick leave requirements including the calculation for payment for sick leave taken by employees who receive commissions.

In Labor Code section 246(k), the reference to "exempt" and "nonexempt" employee for purposes of selecting the appropriate calculation under Labor Code section 246(k) refers to an employee who satisfies both the salary and duties tests in Labor Code section 515(a), and not to the outside sales exemption pursuant to Labor Code 1171 and Section 1(C) of the IWC Orders, nor to the overtime exemption for commissioned salespersons pursuant to Section 3(D) of the Wage Orders as authorized under Labor Code section 515(b).

To the extent there is ambiguity regarding the meaning of "exempt" in the calculation for paid sick leave in Labor Code section 246(k), intent can be ascertained from the statute's context and legislative intent. The language of Section 246 evidences an intent that the distinctions for how to compute PSL is based on whether an employee is exempt (paid a minimum salary for all hours worked and meets the duties test) as a professional, executive, or administrative employee and therefore meets the requirements of Labor Code section 515(a). 3

When the Healthy Workplaces, Healthy Families Act of 2014 was amended by Assembly Bill 304 in 2015, the Legislature created flexibility by allowing employers to calculate a non-exempt employee's pay either by looking back 90 days and dividing total wages paid, excluding overtime pay, by total hours in the full pay periods in the prior 90 days of employment, or by using the regular rate of pay in the pay period in which the leave was taken. An analysis by the Senate Committee on Labor and Industrial Relations at the time AB 304 was being considered indicates that the language in Labor Code 246(k)(3) was meant to apply to an employee exempt as "administrative, executive, or professional". (See Senate Committee on Labor and Industrial Relations, Analysis, Hearing date July 8, 2015.)

Also, the same Legislative Committee Analysis described above also stated a concern regarding commissioned sales persons. The committee analysis stated that paid sick leave could be paid based on either the regular rate of pay in the pay period the paid sick leave is taken or the average pay for the prior 90 days for commissioned sales persons which is consistent with the view that the options provided in (k)(1) and (k)(2) would apply to a commissioned salesperson. This allows

3
The fact that an employee receives at least the minimum salary amount under Labor Code section 515(a) is not itself sufficient to qualify as an exempt employee because the duties test must also be met for an employee to be exempt for purposes of overtime and, as discussed in this letter, for calculation of PSL as well.

Letter to Mr. Branton
October 11, 2016
Page 3

employers to choose either method of calculating payment that would compensate the employee for the sick day but not lead to an inflated rate for the leave if, in fact, a payment was just received for commissions. The Analysis is attached here for your review.

Based on the above, in the first scenario you describe, employees who are paid by commissions must be paid according to Labor Code sections 246(k)(1) or (2).

Secondly, you ask how an employee who is exempt and is entitled to a non-discretionary bonus is required to be paid for a sick day. Normally, an exempt employee would be entitled to continue to receive his or her full pay without deduction for a sick day of less than 8 hours but the day or partial day of sick leave may be deducted from earned or fronted leave balances. (See discussion regarding application of leave for exempt employees in DLSE Opinion Letter 2009.11.23, pp. 4-7).

If the employee is exempt under the administrative, executive or professional exemption and no leave time is provided for any other purpose, then normally the salary would continue without deduction for a sick day with the time applied against leave balances and tracked in accordance with Labor Code section 246(h). The non-discretionary bonus would not figure into the salary of an employee exempt under Labor Code section 515(a) because such bonuses are only figured into the pay of a non-exempt employee in order to determine the regular rate of pay for overtime and to figure the paid sick leave rate under Labor Code section 246(k)(1)-(2). Here, an employee who is exempt under the administrative, executive or professional exemption and uses a full sick day would be paid for an amount of pay which equals his or her regular salary for the sick day because the leave would be computed based on the regular salary, pursuant to Labor Code section 246(k)(3). For a full-time employee, the annual salary would be divided by 52 weeks and then by 5 days to determine the daily wage that would have to be paid for a sick day.

This opinion is based exclusively on the facts and circumstances described in your request and is given based upon your representations, express or implied, that you have provided a full and fair description of all facts and circumstances that would be pertinent to our consideration of the questions presented. The existence of any other factual or historical background not contained in your letter might require a conclusion different from the one expressed herein. You have represented that this opinion is not sought by a party to pending private litigation concerning the issues addressed herein. You have also represented that this opinion is not sought in connection with an investigation or litigation between a client or firm and the Division of Labor Standards Enforcement.

Thank you for your inquiry.

Sincerely,

Susan A. Devi
Attorney for the Labor Commissioner

[This opinion letter enclosed, as an attachment, the Senate Committee on Labor and Industrial Relations' Analysis of AB 304 (Gonzalez), 2015-2016 Regular Session, Hearing Date July 8, 2015 — a separately public California Legislature committee analysis, not the DLSE's own writing. The scan of this attachment is corrupted by extensive OCR/character-recognition noise well beyond the point of reliable word-by-word repair, so it is summarized here. The analysis reviewed AB 304's amendments to the Healthy Workplaces, Healthy Families Act of 2014 (paid sick leave), including the paid-sick-leave-rate calculation methods later codified at Labor Code section 246(k), the retired-annuitant exemption, alternative accrual methods for non-hourly payroll, and stakeholder concerns (raised by, among others, the City and County of San Francisco) about commissioned salespeople and continuous 90-day employment; it reported no opposition on file. Consult the official PDF cited above for the full attachment text.]