California Supreme Court Ups the Ante for Employers to Meet the Commissioned Employee Exemption

Decision: The California Supreme Court recently issued a unanimous decision in Peabody v. Time Warner Cable, Inc., clarifying several issues regarding employer commission plans. Under Time Warner’s commission plan, employees had to meet three specified conditions to “earn” their commissions. Once earned, the commissions were paid in the last biweekly paycheck of each calendar month, in the month after the commission was earned: e.g., a commission earned in November was paid in the second paycheck for December.

The California Supreme Court found that Time Warner’s policy did not satisfy the commissioned sales exemption in California for two reasons.

First, the policy impermissibly allowed commissions to be paid only on a monthly basis. The Supreme Court held that commissions must be paid in the pay period in which they are earned.

Second, Time Warner’s policy impermissibly allowed it to attribute commission wages paid in one pay period to other pay periods for the purpose of satisfying the minimum earnings component of the commissioned employee exemption. (To fall within the commissioned sales exemption, employees must earn more than 1.5 times the state minimum wage, and more than half the employees’ income must come from commission.)

The Supreme Court explained that the minimum earnings requirement for the exemption must be calculated based on the amount of wages “actually paid during that pay period.” In other words, if the employee is not paid enough in a particular pay period to meet the minimum earnings threshold, the employer cannot apply the next pay period’s commission payment to the prior month’s shortfall. The employee would be a non-exempt employee for the shortfall month and eligible for overtime.

Impact: Peabody makes it more difficult for employers to meet the commissioned employee exemption. Employers should modify their commission payment practices to conform to the decision, including modifying their payment practices to ensure that they are paying employees at least $13.50 for every hour worked (1.5 times the $9 minimum wage) and that employees earn more than 50 percent of their wages from commission in every paycheck.

NLRB’s General Counsel Determines that McDonald’s is a Joint Employer with its Franchisees

Decision: The General Counsel of the National Labor Relations Board (NLRB), Richard F. Griffin, has authorized unfair labor practice complaints to issue against McDonald's USA LLC on the grounds that the corporation could be held liable as a joint employer for it franchisees’ treatment of their workers in response to the workers’ protests. Complaints were authorized to issue on 43 of the 212 unfair labor practice charges that McDonald’s employees had filed related to the protests since November 2012. Sixty-four of the charges remain under investigation while 68 were found to have no merit.

Impact: General Counsel Griffin’s position on this franchisor joint employer issue could have wide-ranging implications. For instance, his position could affect other industries that rely upon the franchise model to run their businesses, such as hotels and car rental companies. Further, should the NLRB accept the General Counsel’s position, the joint employer relationship could also apply to union election and collective bargaining processes as well. Finally, such a ruling could open the door for an expansion of the joint employer doctrine in other employment disputes. Pending the NLRB’s final decision, it would be wise for franchisors to review their franchise agreements and the manner in which they conduct their relationships with franchisees to ensure that they are well-positioned to defend against claims of joint employer liability.

California District Court Reaffirms that Collective Bargaining Agreements Define When Overtime Begins

Decision: In Kilbourne v. Coca-Cola Company, the US District Court for the Southern District of California granted partial summary judgment in favor of Coca-Cola in connection with a former employee’s overtime claims. The court held that, although California Labor Code Section 510 sets forth the basic California overtime rules, Labor Code section 514 exempts employers from those requirements where a collective bargaining agreement (CBA) meets certain conditions, including paying premium wage rates for all overtime hours worked.

The plaintiff argued that the applicable CBAs did not satisfy this exemption because they did not provide premium rates for all overtime hours worked, as defined in Section 510. Plaintiff claimed that although he routinely worked more than 10 hours per day and through his lunch period, he was not paid overtime wages for work performed during his 30-minute meal period.

The district court disagreed with the plaintiff, holding that the relevant CBAs—not Section 510—can define the term “overtime hours.” Pursuant to Section 514: “[w]here there is a valid collective bargaining agreement, employees and employers are free to bargain over not only the rate of overtime pay, but also when overtime pay will begin. Moreover, employees and employers are free to bargain over not only the timing of when overtime pay begins within a particular day, but also the timing within a given week.”

Impact: Because the collective bargaining process is perceived as protecting employee interests, courts are willing to uphold provisions in a CBA that do not comport with standard overtime laws. Section 514 of the Labor Code thus allows employers and unions to bargain over not only the rate of overtime pay, but when the entitlement to overtime pay begins, as long as the employer does not manipulate the employees’ workweeks or schedules to avoid paying overtime.