DLSE Opinion Letter 2002.06.14-1 — Commission Pay Plans and Overtime

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STATE OF CALIFORNIA                                                GRAY DAVIS, Governor

DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT50
Santa Rosa,
                                       Santa
                                          D Street,
                                             Rosa Suite
                                                    Legal 860
                                                          Section

CA 95404
(707) 576-6788

H. THOMAS CADELL. Of Counsel




                                      June 14,   2002


Adam C. Abrahams
Jackson Lewis Schnitzler & Krupman
725 South Figueroa Street, Suite 2500
Los Angeles, CA 90017-5408

         Re:      Commission Pay Plans And Overtime

Dear Mr. Abrahams:

     This is in reply to your letter of March 5, 2002, directed to
Arthur Lujan, State Labor Commissioner, requesting DLSE's position
concerning an employer,    subject to Wage Order 2,      employing
commissioned inside salespersons.    These salespersons receive a
monthly "base salary" greater than one and one-half times the
minimum wage1 and are paid bi-monthly.    In addition to the base
salary, the employees receive commissions paid on a monthly basis.
We must admit, however, that the explanation of the commission
schedule is not clear to us.

     Your first question is whether DLSE would find any issues with
the commission plan you describe.      As stated, we can make no
determination on that point inasmuch as we don't have sufficient
facts to evaluate the plan.   We assume that the "par" amount upon
which the commission depends is some objective figure and that the
calculation is not one which would fall within those prohibited by
such cases as Quillian v. Lion Oil (1979) 96 Cal.App.3d 156; 157
Cal.Rptr. 740, Kerr's Catering Service v. Department of Industrial
Relations (1962) 57 Cal.2d 319, 19 Cal.Rptr. 492, 369 P.2d 20, or
Hudgins v. Neiman Marcus (1995) 34 Cal.App.4th 1109.    However, in
order to specifically opine on the plan, we must have all of the
facts.

     Your second question asks whether the employer is required to
pay overtime to the salespersons when they work over eight hours in
a day and/or 40 hours in a workweek.

        You do not indicate any type of exemption you may be relying
        upon, and, quite frankly, we are at a loss to understand why
        the question is asked?     Obviously, unless there is some
        exception to the rule,    the employees must be paid the
        appropriate premium for overtime.


       It is not clear why you mention this wage amount unless you feel that the
employees, covered by Order 2, may be eligible for exemption under the
commissioned sales exemption. That would not be correct, however, because the
exemption is limited to workers covered by Orders 4 and 7 . We mention this only
to alleviate any misunderstanding.
»v***vun*j t              •

June 14, 2002
Page 2


     As an adjunct to the second question, you ask what would
happen if the employees fail to report or attempt to conceal2 their
overtime?

         It is,   of course,   axiomatic that it is the employer's
         obligation to keep accurate time records. (See Labor Code
         § 1174, IWC Orders, Section 7) In addition, the law requires
         that the employee be paid for all hours the employee is
         "engaged, suffered or permitted" to work. Consequently, it is
         up to the employer to develop a system which accurately keeps
         track of the hours worked by the employees.

     Your third question asks whether the employer needs to include
the commissions when determining the regular rate of pay or can it
figure the regular rate based on the base salary?

         The regular rate of pay under California law (as it is under
         federal law) includes "all remuneration for employment paid
         to, or on behalf of, the employee." (29 USC § 207 (e))     In
         determining what payments are to be included in or excluded
         from the calculation of the regular rate of pay, California
         law adheres to the standards adopted by the United States
         Department of Labor to the extent that those standards are
         consistent with California law. This includes, of course, any
         sum paid for hours worked or performing a duty (i.e., "on-
         call" time, selling a product, etc.)

      It has been the long-established enforcement policy of the
      DLSE (which closely tracks the federal regulations in this
      regard) to include such indirect wages as housing, meals, etc.
      These sums are added to the cash wage paid for purposes of
      determining the "regular rate" of pay.     The federal courts
      have addressed this issue and the U.S. Supreme Court in the
      case of Walling v. Youngerman-Reynolds Hardwood Co (1945) 65
      S.Ct. 1242, 1245 noted:

             "The regular rate by its very nature must reflect all
             payments which the parties have agreed shall be received
             regularly during the workweek, exclusive of overtime
             payments.   It is not an arbitrary label chosen by the
             parties; it is an actual fact.     Once the parties have
             decided upon the amount of wages and the mode of payment
             the determination of the regular rate becomes a matter of
             mathematical   computation,  the   result  of   which  is
             unaffected by any designation of a contrary 'regular
             rate' in the contracts." (See also, Walling v. Alaska
             Pacific Consolidated Mining Co. (9th Cir.1945) 152 F.2d
             812, 815)



     2
       In the experience of the DLSE, the fact that California law requires an
employer to pay a premium for overtime actively discourages employees from
surreptitiously concealing the fact that they have worked overtime.
Adam C. Abrahams, Esq.
June 14, 2002
Page 3


     Your third question asks: "If the employer needs to include
commissions, how would the employer determine the regular rate of
pay, especially in light of the fact that the commissions are
determined monthly?”

      The method of calculating the regular rate for piece workers,
      production bonus workers or commission workers has been
      discussed in a number of Opinion Letters issued by the DLSE3
      Either of the following two methods may be used to determine
      the  regular   rate  for   purposes  of   computing  overtime
      compensation:

      1.    Compute the regular rate by dividing the total earnings
            for the week, including earnings during overtime hours,
            by the total hours worked during the week, including the
            overtime hours.    For each overtime hour worked, the
            employee is entitled to an additional one-half the
            regular rate for hours requiring time and one-half and to
            an additional full rate for hours requiring double time.
            This is the most commonly used method of calculation.

      2.    Using the piece or commission rate as the regular rate
            and paying one and one-half this rate for production
            during overtime hours. This method is rarely used.

      It is recognized that the method outlined in alternative 1,
      above,   resembles  the   computation used    in the   illegal
      fluctuating workweek plans.      However, there is a distinct
      difference: Under that federal fluctuating workweek method the
      salaried employee is not given the opportunity to increase his
      or her basic rate; in fact, it is always the case that the
      longer the employee on a fluctuating workweek works, the lower
      the basic hourly rate of the salaried employee becomes. Under
      the DLSE method for piece workers, production bonus workers or
      commission workers, it is recognized that these employees are
      actually given additional time to make more pieces or earn
      more commission in the overtime hours so that the basic hourly
      rate may increase.      Therefore, the Skyline analysis for
      computing the regular rate of pay is inapplicable to computing
      the regular rate for piece rate and commission employees. The
      Skyline court recognized this at 165 Ca.App.3d 239, 254.

      As an alternative, (see 2, above) piece work performed during
      overtime periods may be paid by paying for each piece made
      during the overtime period at the appropriate rate, i.e., time
      and a half (1#) for 8 to 12 hours, or double time (2) over 12
      hours.

      In the situation you describe, the regular rate for the
      commissions would be determined by dividing the total amount


      3SeeO.L. 1993.02.22, 1993.02.22-1,011988.06.15, 1988.03.28, 1994.06.17-1,
1988.07.14, 1987.02.17
June 14, 2002
Page 4


     received in commissions for the month by the total number of
     hours worked in that month. The payment, however, would have
     to be based on the weekly payroll, not the monthly payroll.
     The overtime payment would have to compensate the employees at
     the appropriate premium rate for the overtime hours worked.

     Finally, you ask: "If the employer has not been properly
paying overtime, what process does the employer need to take to
make its policy conform and make its employees whole?

     As you know, Order 2 has always required the payment of
     overtime on a daily as well as a weekly basis.   Consequently,
     the payment of the overtime based on the commission income was
     an obligation of the employer since 1980.

     The employer must make the affected employees whole by paying
     the past due overtime compensation.       This would include
     present as well as past employees.     We have not been told
     whether there is a written policy or agreement concerning this
     commission program so we cannot comment on the length of the
     statute of limitations which might be involved.    We do note
     that the payment of overtime, being a statutory obligation,
     has a three-year statute of limitations even absent a written
     contract or policy.

     We hope this adequately addresses the issues you raised in
your letter of March 5, 2002.  Please excuse the delay in respond­
ing to your inquiry.   However, the information we have furnished
herein is not new or unique; it has been the DLSE enforcement
policy since at least 1980.


Yours truly,



H. THOMAS CADELL, JR.
Attorney for the Labor Commissioner

c.c. Arthur Lujan, State Labor Commissioner
     Tom Grogan, Chief Deputy Labor Commissioner
     Anne Stevason, Acting Chief Counsel
     Assistant Labor Commissioners
     Regional Managers