A Win for Commissioned Salespeople:  Peabody v. Time Warner Cable, Inc.

In order to be exempt from the overtime requirements of California law (as well as other wage and hour laws such as those requiring meal and rest breaks), commissioned employees must meet two requirements: [1]

1.      They must earn more than one and half times the applicable minimum wage[2] (“the minimum wage test”).

2.      They must earn at least half of their wages from commissions.

This test therefore poses the following question:  What about employees who, because of their commission structure, earn less than one and a half times the minimum wage in some pay periods?  Are employers allowed to average an employee’s wages across pay periods in order to determine whether they meet the minimum wage test?

The California Supreme Court recently addressed this issue.  In Peabody v. Time Warner Cable, Inc. the Court held that employers may not consider commission payments in other pay periods in order to meet the minimum wage test of the commissioned employee exemption.

The facts of the case are as follows.  Susan Peabody sold advertising for the cable television operator Time Warner Cable Inc.  She normally worked between 45 and 48 hours per week. Under her payment plan, she received approximately $770 every two weeks.  This was not enough to meet the minimum wage test.

However, Ms. Peabody also received commissions every four weeks.  Her commissions and her biweekly payments, averaged over time, were more than enough to satisfy the minimum wage test.  However, during a majority of her pay periods, Ms. Peabody’s wages did not meet that test.

After her employment ended, Ms. Peabody sued.  She claimed that she was improperly classified as exempt.  As such, she claimed that she was owed overtime.

Time Warner replied that Ms. Peabody was properly classified as exempt because when one averaged her pay across pay periods, she earned more than one and half times the minimum wage per hour.

The California Supreme Court unanimously rejected this argument.  Under federal regulations, employers are allowed to average wages across pay periods.  But such a scheme violates California wage and hour law, which requires that the employees meet the minimum wage test in each pay period.  Under California law, therefore, an employer cannot reassign wages from one pay period to meet the overtime exemption in another pay period.

The holding in Peabody is an excellent example of how courts should interpret wage and hour laws.  As the Court stated in Ramirez v. Yosemite Water Co., overtime exemptions should be construed narrowly so as to protect employees.  Furthermore, there is an easy way to remedy this situation:  Employers that want to avoid paying their commissioned employees overtime need only adjust their wages so that their employees are receiving at least one and a half times the minimum wage during each pay period.  If employers choose not to do so, then they should be required to pay overtime.

If you are paid on commission and denied overtime and/or meal or rest breaks, your employer may be violating California’s wage and hour laws.  If you have questions about your situation, please feel free to contact us for a free consultation.  We can be reached at 510.444.4400, or inquire@hunterpylelaw.com.

[1] This requirement applies only to so-called “inside salespeople.”  The requirements for the “outside salesperson” exemption were explored by attorney Mana Barari in an earlier post on this blog dated May 16, 2014.

[2] Prior to July 1, 2014, the minimum wage in California was $8.00 per hour.  On July 1, 2014, it went up to $9.00 per hour.  On July 1, 2016, the minimum wage in California will increase to $10.00 per hour.