Orange County-Based Panel Relies on Federal Regulations, Ignores California Provision
By Roger M. Grace, Editor
A Court of Appeal opinion, which became final yesterday, holds that employees who receive their recompense solely from commissions are eligible for overtime pay, notwithstanding that the decision, based on federal regulations, overlooks a provision in the California Code of Regulations which declares to the contrary, as to some employees, and clashes with previous decisions, including those of the California Supreme Court.
Justice Thomas M. Goethals of the Fourth District’s Div. Three wrote the opinion in Semprini v. Wedbush Securities, Inc., 2020 S.O.S. 5388, filed Nov. 9. It says:
“Under California law, an employer generally must pay its employee overtime if he or she works above a set number of hours. A person employed in an administrative capacity, however, is exempt from this and other wage and hour requirements if he or she performs certain duties and is paid a monthly salary equivalent to at least twice the state minimum wage for full-time employment.”
Such persons are commonly referred to as “salaried” employees.
“The question presented here is whether a compensation plan based solely on commissions, with recoverable advances on future commissions, qualifies as a ‘salary’ for purposes of this exemption. We conclude it does not. Since the trial court found the employees in question are exempt and entered judgment for the employer, we reverse and remand this matter for further proceedings.”
Having so phrased the issue, Goethals proceeded to declare irrelevant whether an employee is able to draw an advance on future commissions, reasoning that an “advance is not a wage.”
The issue thus boiled down to whether a person employed on a straight commission basis is entitled to overtime pay. Goethals answered that question in the affirmative because such a person is not salaried, explaining that under federal regulations, a salaried employee receives compensation in a “predetermined amount” and “commissions are not a ‘predetermined amount’ exempt from entitlement to overtime pay.”
The opinion reverses a judgment by Orange Superior Court Judge Randall J. Sherman in favor of Wedbush Securities, Inc., which contended that the financial advisors who work for it on straight commissions have no valid claim to overtime.
However, Goethals did not discuss §11040(3)(D) of the California Code of Regulations which relates to persons in “professional, technical, clerical, mechanical, and similar occupations.” That CCR section provides that the requirement of paying overtime “shall not apply to any employee whose earnings exceed one and one-half (1 ½) times the minimum wage if more than half of that employee’s compensation represents commissions.”
Goethals observed that “[n]o California court has addressed whether a compensation plan based solely on commissions…qualifies as a ‘salary’ for purposes of the administrative exemption”—that is, no court has discussed whether an employee on a straight commission comes under the “administrative exemption” set forth in §11040(1)(A). Several courts, however, have considered whether such an employee comes under the “commissioned employee exemption,” contained in §11040(3)(D).
The Fourth District’s Div. One, in its Aug. 29, 2012 opinion in Muldrow v. Surrex Solutions Corp., recognized that in 1978 the California Industrial Welfare Commission (“IWC”) “first adopted the commissioned employees exemption.” The IWC did so in a wage order which was codified in the CCR; it was supplanted by a second wage order which takes the form of §11040(3)(D).
(Although the IWC was defunded in 2004, its wage orders remain in effect.)
The exemption was applied in the California Supreme Court’s July 14, 2014 opinion in Peabody v. Time Warner Cable, Inc., which came in response to a question certified to it by the Ninth U.S. Circuit Court of Appeals. Justice Carol Corrigan wrote for a unanimous court in advising that “[t]he commissioned employee exemption…provides that the overtime provisions” in Labor Code §510(a) “shall not apply” where §11040(3)(D) pertains.
Although Muldrow appears to be the first published California case to refer to the “commissioned employee exemption,” the naming of it was new, but the application of it wasn’t.
The California Supreme Court in its June 17, 1999 opinion in Ramirez v. Yosemite Water Co., Inc. reversed a Court of Appeal decision which affirmed a determination by a Los Angeles Superior Court judge that an “outside salesperson” was not entitled to overtime. The reversal was based on what was perceived as the appeals court’s botched interpretation of the regulation relating to such persons.
But, the high court said, in an opinion for a unanimous court by Justice Stanley Mosk (now deceased), if it were determined on remand that the plaintiff “was a commissioned employee,” he would “be exempt from the overtime statute.”
Then-Presiding Justice Norman Epstein (now retired) recited in his March 29, 2006 Court of Appeal opinion in Harris v. Investor’s Business Daily, Inc. that “California law mandates that all employees who work in excess of eight hours in one workday or in excess of 40 hours in one workweek receive overtime pay,” but added that “[t]his provision does not apply to any employee” who comes under §11040(3)(D).
The action against Wedbush Securities, Inc. was tried on the plaintiff’s theory that the “administrative exemption” applied. Goethals, while not obliged to apply a different affirmative defense on appeal, by not mentioning the “commissioned employee exemption” in his opinion, created an impression that, as a general proposition, employees on commission are entitled to overtime.
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