Separate Compensation for Rest Periods for Commission-Based Employees

The California Court of Appeal for the Second District ruled in Vaquero v. Stoneledge Furniture LLC that workers paid on a commission basis must be separately compensated for legally required rest periods.1 Coupled with the California Supreme Court’s ruling late last year in Augustus v. ABM prohibiting on-call rest periods, it is more important than ever for employers to be vigilant about complying with rest period requirements.2

i. The Requirement to Separately Compensate Rest Periods in Piece-Rate Compensation.

The IWC Wage Orders require employers to count “rest period time” as “hours worked for which there shall be no deduction from wages.”3 In 2013, California appellate courts issued two decisions concerning the application of California's minimum wage laws to piece-rate compensation.

In Gonzalez v. Downtown LA Motors, the Court of Appeal held that Wage Order No. 4 applied to piece-rate compensation in the same manner it [did] for hourly compensation.4 With regard to the requirement that employees be paid the minimum wage “for all hours worked,” the Court concluded piece-rate employees were entitled to “be compensated at the minimum wage for each hour worked,” rather than by averaging compensation over a period of time. Thus, the Court held that under California law, piece-rate employees were entitled to separate hourly compensation for non-productive time, including time spent waiting for tasks, attending meetings and trainings, or performing other work for an employer.5

Months later, in Bluford v. Safeway Stores, Inc., the Court of Appeal held that allowing employers to account for rest periods indirectly by negotiating a higher piece-rate violated California law because the compensation structure averaged pay to comply with the minimum wage requirement rather than separately compensating employees for their rest periods at the minimum or contractual hourly rate.6 Following the Gonzalez and Bluford decisions, California enacted Assembly Bill 1513. A.B. 1513 added section § 226.2 to the Labor Code to address the claims of piece-rate employees for recovery of wages and related damages and penalties. Section 226.2 clarified and settled the pay requirements for mandated rest and recovery breaks and other nonproductive time for piece-rate compensation agreements.

Until now, the law was unsettled as to whether employers’ obligation to pay for rest periods and other nonproductive time separately extended to other incentive pay plans. The Vaquero decision addressed that.

ii. The Requirement to Separately Compensate for Rest Periods Applies to Employees Paid on Commission

The Court in Vaquero held that Wage Order No. 7 applied equally to commissioned employees as to employees paid by piece-rate, or any other compensation system that did not directly provide compensation for rest breaks and other nonproductive time. The Court noted the commission agreement used by Stoneledge during the class period is “analytically indistinguishable” from a piece-rate system in that neither allowed employees to earn wages during rest periods.

The Court found it illogical to assume that a commission-based employee working 100 minutes more per 40 hour work week would not earn more in commissions than an employee who spent those same 100 minutes on break. This is because the employee who did not take breaks could spend those 100 minutes greeting new customers, following up with potential leads, or answering emails and phone calls relating to pending orders, which is far more likely to lead to sales resulting in pay over and above the minimum rate.

iii. Stoneledge’s Commission Agreement Did Not Separately Compensate Sales Associates for Rest Periods.

Stoneledge compensated their sales associates pursuant to a Commission Agreement. Upon termination of their employment, employees Vaquero and Schaefer filed a class action complaint alleging that Stoneledge's Commission Agreement failed to adequately compensate them for rest periods in violation of California law.

Under the Commission Agreement, if a sales associate failed to earn a “minimum pay” of at least $12.01 per hour in commissions in any pay period, Stoneledge paid the associate a draw against future advanced commissions. The Commission Agreement explained, “[t]he amount of the draw will be deducted from future advanced commissions, but an employee will always receive at least $12.01 per hour for every hour worked.”

Stoneledge contended the Commission Agreement properly compensated employees for rest periods because an employee was guaranteed the minimum pay of $12.01 per hour. The Court reasoned, however, that such a plan was similar to Bluford in that it did not directly compensate sales associates for rest periods. Further, the Court found the advances or draws against future commissions were not compensation for rest periods because they were not compensation at all; at best, they were “interest-free loans.” The Court reasoned that taking back money paid to the employees effectively reduced either rest period compensation or the contractual commission rate, both of which violated California law.7

iv. What This Means for Employers

Taken with the decision in Augustus, employers have yet another obstacle to navigate in the already complex system of California wage and hour law. The Court held that Stoneledge’s compensation agreement was unlawful, but it did not provide guidance regarding how to appropriately structure commission compensation moving forward.

Notwithstanding, Stoneledge subsequently implemented a new commission agreement that paid sales associates a base hourly wage of $10 (the minimum wage at the time) “for all hours worked.” In addition, sales associates could earn various types of incentive payments based on a percentage of sales. Under the new agreement, no portion of a sales associate’s base pay could be deducted from or credited against incentive payments. This revised plan was not challenged by plaintiffs and, as such, may provide guidance regarding appropriate compliance moving forward.

As California law continues to become more complex, it is more important than ever for employers to ensure careful compliance. Wage and hour violations can quite easily turn into costly class action lawsuits and may carry hefty civil penalties. Before implementing any incentive based payment plans, an employer should be sure to separately and directly compensate for rest periods at the minimum wage, or as further defined by law. Anyone with an existing commission compensation plan should conduct a full audit of the plan to make sure it follows the requirements set forth in Vaquero.

1 Vaquero v. Stoneledge Furniture LLC (2017) 9 Cal.App.5th 98.

2 Augustus v. ABM (2016) 2 Cal.5th 257 (holding employers’ requirement that employees remain “on-call” during rest periods violated employer’s obligation to relieve employees of all duties during rest periods.) For further analysis of the Augustus and related decisions, click here.

3 8 CCR §11070(12)(A).

4 Gonzalez v. Downtown L.A. Motors (2013) 215 Cal. App. 4th 36, 49.

5 Gonzalez, 215 Cal. App. 4th at 40–41.

6 Bluford v. Safeway Stores, Inc. (2013) 216 Cal. App. 4th 864, 871.

7 An employer may not collect or receive from an employee “any part of wages theretofore paid by said employer. Cal. Lab. Code § 221. An employer may not withhold any part of a wage agreed upon. Cal. Lab. Code § 222. An employer is prohibited from “secretly paying a lower wage while purporting to pay the wage designated by statute or by contract.” Cal. Lab. Code § 223. An employer may not average wages across pay periods to satisfy minimum wage requirements “effectively reduces employees’ contractual hourly rate. Armenta 135 Cal.4th at 323.