Additional hurdles for nonexempt employees on commission

Most employers in California are aware that their nonexempt employees are entitled to paid rest breaks, and are entitled to be paid for all time that they are under the employer's control, even if they are not being productive. But employers who pay their nonexempt employees piece rate or commission wages have an additional hurdle to meet to ensure that they are meeting these wage requirements, because no matter how high the commission or piece-rate earnings, employers must pay additional, separate compensation for rest breaks and other nonproductive work time.

The rest break obligation is fairly straightforward. Employees must be authorized and permitted to take one 10-minute paid rest break for every four hours of work, or major fraction thereof. Thus, employees receive one paid rest break if they work between 3.5 and six hours, two paid rest breaks if they work between six and 10 hours, and three paid rest breaks if they work between 10 and 14 hours. During their paid rest breaks, employees must be relieved of all duties and be free from employer control, yet paid for that time. Employees who work outside are also entitled to paid "recovery" breaks ? cool-down rest in the shade for a period of no less than five minutes when employees feel the need to protect themselves from overheating. A regular hourly employee receives his or her hourly rate of pay for all of his or her rest or recovery breaks ? a fairly straightforward calculation.

An employee who receives piece-rate compensation receives pay according to the number of units turned out, and an employee who receives commission wages receives pay based on a percentage of sales of the employer's services or products. Nonexempt piece-rate employees and commission-based employees may or may not receive any other compensation, but are also entitled to paid duty-free breaks. What employers may not realize is that they must calculate and pay wages for those breaks separately.

There is a specific Labor Code section governing this issue for piece-rate employees. Section 226.2, which has been in effect since the beginning of last year, provides employees compensation separate from their piece-rate compensation for rest, recovery and other nonproductive time. To calculate the compensation for a rest or recovery break, an employer must determine the higher of (1) an average hourly rate calculated by dividing the total compensation for the workweek (not including pay for rest and recovery periods or any premium pay for overtime) by the total hours worked during the workweek (not including rest and recovery periods), or (2) the applicable minimum wage. Employers must calculate the appropriate compensation for rest or recovery periods each week. For other nonproductive work time such as meetings or other time where the employee is not turning out units, employers must pay employees at an hourly rate of at least minimum wage.

For commissioned employees, a recent court decision held that the same principle applies. In Vaquero v. Stoneledge Furniture LLC, former furniture sales associates claimed that their commission plan prevented them from being paid for rest breaks. Under the commission plan, they received the greater of their earned commissions or a guaranteed minimum wage each pay period. The guaranteed minimum wage consisted of whatever commissions were earned in the pay period, plus a draw against future commissions.

The court found this commission plan did not pay employees for rest periods. This was because employees who received pure commissions in a pay period received nothing separate for rest periods, and employees who received the guaranteed minimum wage for hours worked, including rest periods, were required to pay back those wages from their future earned commissions. The court held that separate pay for rest periods is required unless the compensation plan already includes a minimum hourly wage for that time. The court did not opine as to what that minimum hourly wage should be, and declined to rule on whether nonexempt employees could be paid a salary that compensates them for rest periods and other nonproductive work time.

Regardless, employers of nonexempt commissioned salespersons must ensure that those employees log their time spent in rest breaks and other nonproductive work time, and must pay those employees separately for that time at no less than minimum wage. In addition, this cannot be accomplished as a draw against future commissions. This rule generally will apply to all salespersons paid on commission, except for outside sales employees who spend at least 50 percent of their time away from the employer (i.e., with customers) engaged in sales. Outside sales employees in this category are exempt from minimum wage and other wage order requirements.

The upshot for California employers with nonexempt employees who do not receive a traditional regular hourly wage is that those employers need to be careful not to assume that the piece-rate or commission pay earned by the employees is sufficient to cover paid rest breaks or other nonproductive time. Although these employees may be handsomely compensated, they must be paid separately, and additionally, for those activities.