Commissioned Employees are Entitled to Separate Pay for Rest Breaks

By Kim Silvers, SPHR-CA, SHRM-SCP

California employers received another surprise court decision requiring commissioned sales employees to be paid separately for their state-required rest breaks.  This decision is somewhat related to earlier decisions (and eventual state law) requiring piece rate workers to be compensated separately for rest breaks. If you have commissioned (inside sales) employees, read on and be prepared to review and edit your current compensation plans.

In Vaquero v. Stoneledge Furniture LLC, two former sales associates filed a class action suit against their former employer, Stoneledge Furniture, claiming that the company’s commission plan did not compensate them correctly for their mandatory rest breaks (minimum 10 minutes for every 4 hours worked, or major fraction thereof).[1] 

From 2009 through March 2014, Stoneledge Furniture paid their sales associates under a commission plan that included a base pay guarantee of at least $12.01 per hour. The base pay was applied toward commission earned (aka a “recoverable draw”).  If the sales associate earned less than $12.01 per hour in commission in any pay period, the company paid him/her a draw against future advanced commissions.  The commission plan noted that “The amount of the draw will be deducted from any future Advanced Commissions, but an employee will always receive at least $12.01 per hour for every hour worked.”  The commission plan did not note or allow separate compensation for non-selling time such as training, meetings or rest breaks.

The trial court sided with the employer agreeing that employees were paid at least $12.01 per hour even if they made no sales in the pay period.  This paid time included rest breaks.  However, the plaintiffs appealed to the CA Court of Appeal and won.  This case has a significant impact on other employers paying commission.

Appellate Court Rules Wage Order No. 7 Requires Employers to Separately Compensate Covered Employees for Rest Periods

The Court of Appeal took another look at the Industrial Wage Order (IWO) 7 language around rest periods.  (IWO 7 applies to the mercantile industry, but this rest period language is very similar in other wage orders.)  The IWO requires that “Authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages.”  When a sales associate’s commission did not exceed the minimum rate in each week, Stoneledge deducted from future paychecks any wages advanced to compensate him/her for hours worked, including rest periods.  The appellate court determined that 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…. Taking back money paid to the employee effectively reduces either rest period compensation or the contractual commission rate, both of which violate California law.”

The appellate court noted: “…Wage Order No. 7 applies equally to commissioned employees, employees paid by piece rate, or any other compensation system that does not separately account for rest breaks and other nonproductive time.” The court further noted: “The problem with Stoneledge’s compensation system, however, is that the formula it used for determining commissions did not include any component that directly compensated sales associates for rest periods.”   

For now, this ruling will apply to CA trial courts for similar cases.  It is not known if the ruling will be appealed further.

Here are our recommendations if you have commissioned employees:

1. Ensure your commission plan is in writing and signed by each employee. This is a state law.
2. Reconsider your use of a recoverable draw. It is risky for a commission plan to pay employees a guaranteed minimum hourly rate as a draw against their future commissions. (This is the kind of plan Stoneledge Furniture had.) The safer path is paying a base hourly rate for all hours worked (production and non-production time such as training, meetings and rest breaks) and a commission on top of that base rate.
3. Remember that all time in and out should be recorded for hourly employees, including commissioned inside sales.
4. Piece rate and commissioned employees should be compensated separately for rest break time and have this noted on the itemized wage statement. This rest break pay should not be subject to a draw against commissions.  (Piece rate employees’ itemized wage statements must also note the non-piece work pay rates and time as well.)
5. Have an employment attorney review your commission pay plan each time you update it to ensure it is defensible.

[1] There was not an issue of whether rest breaks were authorized, permitted or any missed/shorted break premiums were owed.