Focus on California: Commission Plans for Non-Exempt Sales Employees Must Separately Compensate for Rest Periods

The California 2nd District Court of Appeal has concluded that a California wage order requiring employers to count “rest period time” as “hours worked for which there shall be no deduction from wages” requires employers to compensate non-exempt employees for rest periods.

Plaintiffs Bermudez Vaquero and Robert Schaefer worked as sales associates for Stoneledge Furniture, LLC, doing business in California as Ashley Furniture HomeStores. Following the termination of their employment, they filed a class action complaint and sought declaratory relief based on allegations that the company (i) failed to compensate commissioned sales associates in compliance with California Labor Code section 226.7 and the applicable wage order; (ii) failed to pay all wages owed at termination in compliance with California Labor Code section 203; and (iii) engaged in unfair business practices. The trial court certified a class of sales associates consisting of three subclasses related to unpaid rest periods, unpaid wages at termination and unfair business practices.

Under Stoneledge’s commission plan, if a sales associate failed to earn the “Minimum Pay” of $12.01 per hour in commissions during a pay period, the company would pay the difference for that hour with a “draw … deducted from future Advanced Commissions.” The issue, however, was that this plan did not compensate sales associates for non-sales time (e.g., time in meetings, certain training and rest periods).

Stoneledge defended this plan, explaining that “all time during rest periods was recorded and paid as time worked identically with all other work time” and that sales associates were paid minimum wage “even if they ma[d]e no sales at all.” Further, even though Stoneledge deducted previously paid draws from sales associates’ paychecks, “repayment [was] never taken if it would result in payment of less than the [Minimum Pay of $12.01 per hour] for …  all time worked in any week.” At trial, Stoneledge moved for summary judgment, or summary adjudication in the alternative, on several grounds. First, Stoneledge asserted that the plaintiffs’ rest-period claim failed as a matter of law because sales associates were paid a guaranteed minimum for hours worked. Second, Stoneledge challenged the plaintiffs’ section 203 claim on the grounds that rest-period “premium pay” was not recoverable under section 203 and that the company did not act willfully, as is required to be deemed a section 203 violation. Third, Stoneledge argued that the plaintiffs’ unfair practices claim failed as derivative of the others. The trial court granted summary judgment for Stoneledge, concluding that the rest-period claim failed and that the remaining claims failed as derivatives thereof. The plaintiffs subsequently appealed.

In reaching its decision in favor of the plaintiffs, the Court of Appeal analyzed Stoneledge’s commission plan and rest-period policy in relation to California Labor Code section 226.7, Industrial Welfare Commission (IWC) wage order No. 7-2001 (Wage Order 7) and relevant case law. Under section 226.7, an employer cannot require an employee to work during a meal, rest or recovery period that is mandated by statute or IWC order. Further, if an employer fails to properly provide a meal, rest or recovery period, section 226.7 provides that the employee must be paid an additional hour of pay at the employee’s regular compensation rate for each workday where the meal, rest or recovery period was not provided. Wage Order 7 (i) establishes an employer’s duty to pay “all persons employed in the mercantile industry whether paid on a time, piece rate, commission, or other basis” the minimum wage “for all hours worked”; (ii) establishes the framework for employee rest periods; and (iii) like section 226.7, requires employers to compensate employees for rest periods not provided.

The court also relied on two relevant cases, Armenta v. Osmose, Inc., 135 Cal. App. 4th 314 (Cal. App. 2 Dist. 2005) and Bluford v. Safeway Stores, Inc., 216 Cal. App. 4th 864 (Cal. App. 3 Dist. 2013). In Armenta, the court held that employers could not satisfy minimum-wage requirements by averaging wages across pay periods. In Bluford, the court held that Wage Order 7 required employers using an “activity based compensation system” that did not directly compensate for rest periods to separately compensate employees for rest periods.

In view of the relevant law and decisions, the court concluded that Wage Order 7 requires separate compensation for rest periods where, as here, the plan does not already include a minimum hourly wage for that time. Having found that the plain language of Wage Order 7 required employers to count “rest period time” as “hours worked for which there shall be no deduction from wages,” the court had to address Stoneledge’s contention that the order did not apply here. Finding that the order plainly included those paid on commission and that no aspects of the compensation plan justified different treatment, the court rejected Stoneledge’s assertion.

The court also based its decision on the similarities between Stoneledge’s compensation plan and a piece-rate system that likewise does not account for rest periods during which employees cannot earn wages. Observing that California’s Division of Labor Standards Enforcement treats commissioned and piece-rate employees in the same manner in relation to the minimum wage requirement for nonproductive working hours, the court found “no reason California law should not treat these categories of workers the same for purposes of complying with the requirement to provide paid rest periods.” The court then turned to California’s view of “the right to a rest period as so sacrosanct that it is unwaivable.” Because “[c]ompensation plans that do not compensate employees directly for rest periods undermine this protective policy by discouraging employees from taking rest breaks,” the court found more support for its decision in favor of the plaintiffs.

In light of these considerations, the court concluded that Stoneledge’s commission plan failed to separately compensate sales associates for rest periods as required under California law. More specifically, the plan failed to properly compensate sales associates who earned a commission for rest periods taken and paid them the same amount regardless of whether they actually took those breaks. In addition, for those who did not reach the commission minimum, the pay “advance” similarly failed to compensate employees for rest periods. In the court’s view, these advances “were not compensation at all.” Rather, they were “at best … interest-free loans,” which took money back from employees and effectively decreased the rest period or contractual compensation rate in violation of California law.

For these reasons, the court directed the trial court to vacate its order granting Stoneledge’s motion for summary judgment, to enter a new order denying the motion with regard to the section 226.7 violation and to address the plaintiffs’ remaining claims on the merits. However, the court was careful to explain that its decision was not intended to question the overall legality of commission-based compensation. Rather, the court’s goal was to clarify that, in order to comply with California law, such plans must separately compensate non-exempt sales employees for rest periods.

This litigation highlights the strong public policy in California favoring a broad application of the framework for establishing rest breaks and the requirement for employers to compensate employees for rest breaks not provided.

Vaquero v. Stoneledge Furniture LLC, 9 Cal. App. 5th 98 (Cal. App. 2 Dist. 2017).