Employment Law Alert: California Supreme Court Rejects Time Warner’s Employee Commission Plan

In Peabody v. Time Warner Cable, Inc., No. S204804, published July 14, 2014 (Peabody), the California Supreme Court held that an employer may not attribute commission wages paid during one pay period to a prior pay period.

This class action lawsuit was brought on behalf of Time Warner employees that were paid according to an account executive compensation plan. The class representative was paid hourly wages in addition to commissions for advertising she sold on the company’s cable television channels. She alleged violations of California law for failure to pay overtime, failure to pay minimum wage, and failure to pay commissions. The District Court granted summary judgment as to all claims. On appeal, the Ninth Circuit affirmed the judgment as to the alleged unpaid commissions, but asked the California Supreme Court to interpret California law regarding whether commissions can be allocated over the course of a month, or whether the commissions must only be counted toward the pay period in which the commissions were paid.

Time Warner argued the compensation structure satisfied the exemption for commissioned employees. However, to qualify for the exemption, Wage Order No. 4 requires that the employee’s earnings must exceed $12 per hour or one and half times the minimum wage. Noting that it was undisputed the plaintiff’s non-commission wages did not satisfy the exemption, the court analyzed whether commissions paid on a monthly basis could be allocated to another pay period. The court held that an employer satisfies the minimum earnings prong of the commissioned employees’ exemption only in those pay periods in which it actually pays the required minimum earnings. In other words, an employer cannot reassign commission wages to the pay period when they were earned.

The California Supreme Court’s reasoning in Peabody is unlikely to sit well with employers that provide a commission structure to employees, especially where the commissions earned are substantial and an employee’s monthly or annual pay far exceeds the minimum wage. Although Peabody provides no specific guidance to California employers going forward, the court has essentially left two options: pay wages in accordance with the commission exemption or pay commissions on a semi-monthly basis so as to guarantee employees are compensated in accordance with minimum wage and overtime laws.

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July 16, 2014