A California appellate court ruled on February 28, 2017, in Vaquero v. Stoneledge Furniture LLC, that employees paid on a commission basis must be separately compensated for legally required rest breaks if their wages are only based upon commissions earned.

By way of background, under the Industrial Welfare Commission Wage Orders, California employers are required to provide non-exempt employees working at least three and a half hours in a workday with a paid 10-minute duty-free rest break for each four hours of work or major fraction thereof. For employees paid by piece rate, Labor Code section 226.2 was issued effective January 1, 2016 to establish that piece rate employees must be compensated separately for their rest breaks and the rate at which these rest breaks are to be paid is the applicable minimum wage or the average productive rate, whichever is greater.

Until now, the law was unclear regarding whether commission-paid employees are also entitled to separate compensation for legally mandated rest breaks. That question was addressed and decided in Vaquero. In Vaquero, the employees at issue had a commission agreement whereby they earned commissions based on a percentage of sales or a guaranteed draw against commissions for each hour worked in the pay period (including rest breaks). Any draws paid were recouped from future commissions. While the trial court rejected the plaintiff’s challenge to this method of pay and ruled that the commission agreement adequately compensated them for all hours worked, including rest breaks, the appeals court reversed this ruling deciding both that (1) employees paid on commission are entitled to separate compensation for rest breaks and (2) that because the draw was recouped from future commissions, it could not constitute a separate payment for rest breaks. The court stated “[a]t best [the draws] were interest-free loans.” The appeals court further held that commissions earned from productive selling time did not account for non-selling time spent on rest breaks or other non-productive time, much as the courts now view non-productive time for employees paid on piece rates. The court held that because the commission would be the same regardless of whether rest breaks were taken, neither a draw nor a commission payment constituted compensation for rest breaks as required. Accordingly, the appeals court found that unproductive time, including rest breaks, had to be compensated separately and could not be included or averaged with commissions paid for productive time to satisfy legal requirements.

The effect of this decision goes far beyond rest breaks. Employers with commission-paid employees now must account for and separately compensate all unproductive (non-selling) time, including rest breaks, from sources other than commissions. However, there are still unanswered questions like what method should be used to make these payments and what rate should the payments be at. The Vaquero case appears to provide that this unproductive time must be paid at least at minimum wage but no further guidance is provided.

If the courts are now going to treat commission plans as they do piece rate plans, alternatives to satisfy the issues raised in Vaquero include:

1. Pay commissioned employees at least minimum wage for all hours worked and calculate a lower commission or bonus to incentivize sales activities that is paid on top of the hourly rate.
2. Track and pay a separate rate for all non-sales activities, including, but not limited to, rest breaks, meetings and trainings, and pay commissions and bonuses for sales activities.

Be aware though that either of these alternatives can also impact whether or not commissioned employees can be considered exempt from overtime.