Some Salespersons are Entitled to Overtime Pay

Many employers tell their employees they will not be paid overtime because the employee is considered a "Salesperson." In this article we illustrate how some employers may improperly classify their employees as "salespersons" in order to avoid overtime. In such cases, an experienced employment attorney such as Kokozian Law Firm can help.

The general rule in California is that, unless an exemption applies, California employers must pay their employees overtime as required by California's overtime and wage and hour laws:

If an employee works more than 8 hours in any one workday, or more than 40 hours in any one workweek, the employee must be compensated at "the rate of no less than one and one-half times the regular rate of pay for an employee." Cal. Labor Code § 510. In addition, an employee must be compensated at "the rate of no less than one and one-half times the regular rate of pay for an employee" for the first 8 hours worked on the seventh day of work in any one workweek.

If an employee works "in excess of 12 hours in one day," the employee shall be compensated "at the rate of no less than twice the regular rate of pay for an employee." Cal. Labor Code § 510.

If an employee works in excess of eight hours on any seventh day of work in any one workweek, he or she "shall be compensated at the rate of no less than twice the regular rate of pay of an employee." Cal. Labor Code § 510.

Sometimes referred to as the "inside sales" or "inside salesperson" or "commission sales" or "salesperson" exemption, California overtime pay requirements do not apply to employees who earn more than 1.5 times the minimum wage if more than half of that employee's compensation represents commissions. 8 Cal. Code of Regulations §§ 11040, subd. (3)(D), 11070, subd. (3)(D); Ramirez v. Yosemite Water Co., Inc. (1999) 20 Cal.4th 785, 803. 

The current federal minimum wage is $7.25 per hour. Currently, California minimum wage is substantially higher than the federal minimum wage, and will reach $15 an hour for most California employees on January 1, 2023. Cal. Labor Code § 1812.12. Moreover, some California cities impose on employers located within their boundaries a minimum wage for each hour worked that is higher than the state minimum wage. The California Constitution authorizes cities and counties to set minimum wages so long as they do not conflict with (are lower) than the state minimum wage. Cal. Constitution, Article 11, § 7. Therefore, for purposes of determining whether a salesperson earns more than 1.5 times the minimum wage and therefore is exempt from California overtime pay requirements assuming more than half of his or her compensation represents commissions, either California minimum wage, or the minimum wage of the city (or county) in which the employee works, whichever is higher, controls.

Commissions are wages "paid to any person for services rendered in the sale of such employer's property or services and based proportionately upon the amount or value thereof." Cal. Labor Code § 204.1.

For the salesperson exemption to apply, earnings actually paid in a given pay period must exceed 1.5 times the minimum wage. Employers may not attribute wages paid in a pay period when more than 1.5 times the minimum wage was paid for all hours worked to another pay period when less than 1.5 times the minimum wage was paid to make up for the shortfall. Peabody v. Time Warner Cable, Inc. (2014) 59 Cal.4th 662, 692. This is consistent with the purpose of the exemption's minimum earnings requirement of more than 1.5 times the minimum wage, which is to ease the burden imposed on employees exempted from receiving overtime. This is also consistent with Cal. Labor Code § 204, which requires that all wages earned for labor in a normal work period be paid no later than the payday for that payroll period.

In addition, for the salesperson exemption to apply, the employee must be both (i) involved principally in selling a product or service, rather than making the product or rendering the service, and (ii) the amount of the commission must be a percent of the price of the product or service. For example, in Keyes Motors, Inc. v. Division of Labor Standards Enforcement (1987) 197 Cal.App.3d 557, 563, a California Court of Appeal held that mechanics are not salespersons, despite the fact they would "upsell" customers, because principally they render the service of fixing cars.

Managers are not salespersons. Hammitt v. Lumber Liquidators, Inc. (S.D. Cal. 2014) 19 F.Supp.3d 989, 996-997.

To be exempt, it is not enough that an employee receives a commission. The exemption will not apply if the employee is not a true salesperson. Keyes Motors, Inc. v. Division of Labor Standards Enforcement (1987) 197 Cal.App.3d 557. A production bonus is not a commission. A true commission is based on the price of the product or service one is selling. For example, in Harris v. Investor's Business Daily, Inc. (2006) 138 Cal.App.4th 28, 38, telemarketers were found to not be salespersons because their pay was based on the number of subscriptions and the price of the subscriptions did not increase or decrease their pay.

If the employee earns less than half of his or her compensation in commissions, the employee is entitled to overtime pay. If the employee receives payments characterized by the employer as "commissions" but the employee's primary job duty is not making sales, the employee also is entitled to overtime pay. The classification of a worker is not determined by his or her job title or the title attached to his or her earnings. The employer bears the burden of proving this or any other exemption from California overtime laws. Ramirez v. Yosemite Water Co., Inc. (1999) 20 Cal.4th 785, 850.

Tips/gratuities paid to service employees by customers may never be considered commissions for the purpose of this exemption. "No employer or agent shall . . . require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer." Cal. Labor Code § 351.

Regardless of whether California overtime pay requirements apply to a particular employee who receives commissions, such employees are generally still entitled to the other protections under California wage and hour laws, including paid rest periods and meal periods. Vaquero v. Stoneledge Furniture LLC (2017) 9 Cal.App.5th 98, 111.

If you have not been granted proper overtime wages, contact the leading lawyers in California for overtime compensation at Kokozian Law Firm, APC. Ask about our free initial consultation.