Employees who are paid solely on commission must receive separate compensation for rest breaks.

On February 28, the California Court of Appeal ruled in Vaquero v. Stoneledge Furniture, LLC ^[1] that employees who are paid solely on commission must receive separate compensation for rest breaks. The court also ruled that employers violate this requirement if they pay employees a guaranteed minimum hourly rate as an advance on commissions earned in later pay periods.

Background

Plaintiff Ricardo Bermudez Vaquero was employed as a sales associate for Stoneledge Furniture, receiving commissions pursuant to a sales compensation plan. The plan guaranteed employees “minimum pay” of $12.01 per hour or $480.40 per week. If sales associates did not earn at least $480.40 by the end of the workweek, they were paid a “draw” from “future advanced commissions” to bring them up to their minimum pay for the week.

Mr. Vaquero filed a class action alleging Stoneledge’s compensation system failed to provide him and other sales associates with paid rest breaks in violation of California Labor Code Section 226.7. Stoneledge moved for summary judgment, and the trial court granted Stoneledge’s motion. The trial court found that the compensation system sufficiently “accounted for all time worked and guaranteed that [sales associates] would be paid more than $12 an hour for those hours. With this system there is no way that the employees’ rest period time would not be captured in the total amount paid each pay period.”

California Court of Appeal’s Decision

The court of appeal reversed, citing Bluford v. Safeway Stores, Inc.^[2] and Armenta v. Osmose, Inc.^[3] The court explained that “the plain language of Wage Order [7-2001] requires employers to count rest period time” as “hours worked for which there shall be no deduction from wages.” (emphasis in original).^[4] Thus, according to the court, employers are required to “separately compensate employees for rest periods if an employer’s compensation plan does not already include a minimum hourly wage for such time.” The court decided that this “separate compensation” requirement applied not only to piece-rate compensation plans but also to commission-only compensation plans.

Stoneledge argued that the language of Wage Order 7 does not mandate separate compensation for rest breaks, but requires only compensation for “hours worked” and that an employer not deduct from such compensation for rest breaks. Stoneledge argued that its compensation plan did compensate sales associates for rest breaks by guaranteeing them an hourly rate for all hours worked (including rest breaks) well above the required minimum wage. The court of appeal disagreed: “[W]hen Stoneledge paid an employee only a commission, that commission did not account for rest periods. When Stoneledge compensated an employee on an hourly basis (including for rest periods), the company took back that compensation in later pay periods.” The court concluded that under this compensation system, “the formula it used for determining commissions did not include any component that directly compensated sales associates for rest periods.” In this regard, the court found that “advances or draws against future commissions were not compensation for rest periods because they were not compensation at all.”

The court concluded that while it was not questioning the legitimacy of “commissioned based compensation. . .we hold only that such compensation plans must separately account and pay for rest periods to comply with California law. . . .Because Stoneledge did not separately compensate sales associates for rest periods as required by California law, the trial court erred in granting summary adjudication on the plaintiffs’ cause of action for violation of section 226.7.”

What the Decision Means for Employers

The decision highlights the risk of paying employees on a commission or piece-rate only basis, without any component of the compensation plan that directly compensates employees for rest periods. California employers who have such compensation plans should carefully evaluate their practices for compliance with California’s rest break and minimum wage requirements.

_{[1] No. B269657 (CA 2, Feb. 28, 2017)}

_{[2] (2013) 216 Cal. App. 4th 864}

_{[3] (2005) 135 Cal. App. 4th 314}

_{[4] Although the California Court of Appeal limited its decision to Wage Order 7-2001, this same language is found in most other Wage Orders that have broad application.}