Court Breaks New Ground on What Qualifies as a Commission for Overtime Exemption Under California Law

Making new law on what qualifies as a “commission” for purposes of the overtime exemption for salespeople, a California Court of Appeal upheld a pay plan that compensates sales employees at a fixed rate for each product sold as opposed to relying on a percentage of the sales price.

In Areso v. CarMax, Inc.1 a former sales consultant of CarMax filed a class action against the company alleging that CarMax violated the California Labor Code by classifying her and other sales consultants in California as exempt and failing to pay her overtime. CarMax utilized a compensation plan for its sales consultants, who sold used vehicles, warranty plans, and vehicle accessories, with a uniform dollar payment for each sale of a vehicle or service plan. Concerned with the applicability of the California salesperson overtime exemption, CarMax modified its pay plan for California employees and used a formula which took into account the number of vehicles sold and the average price of the vehicles – such that a sales consultant would earn approximately the same uniform payment per vehicle sold. CarMax used this uniform payment based on the number of vehicles sold instead of a percentage of the sales price so that its salespeople did not push higher priced cars.

CarMax classified its sales consultants as overtime exempt based on the commissioned salesperson exemption. In California, an employee covered by Wage Orders 4 or 7 may be exempt from the overtime requirements if that employee earns more than one and a half times the minimum wage and more than half of the employee’s compensation represents commissions. The California Labor Code also has a section applicable to vehicle dealers, which defines commissions as “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.”2 Although this code section and the case dealt with vehicle dealers, the court noted that other courts have found that the code section’s definition of commissions are more generally applicable.

The California Supreme Court had previously approved a two-part test to determine whether an employee is a commissioned salesperson exempt from overtime. First, an employee must be involved principally in selling a product or service. Second, the amount of the employee’s compensation must be a percent of the price of the product or service.3 Although CarMax’s compensation plan used a formula that resulted in a uniform payment per vehicle sold as opposed to a strict percentage of the price, the court in Areso found that under the language of the statute, the pay plan was based proportionately on the amount of vehicles sold, and thus qualified as a commission. The court thus distinguished between commissions based upon the value (price) of a product, and those based upon the amount (number) of product sold. The court rejected the position of the California Division of Labor Standards Enforcement, which had published in its enforcement manual that uniform payment constitutes “piece-rate” work and not commissioned sales work. The court held that piece-rate work pays employees for each piece of product finished, appointment made, or procedure completed – whereas the employees here made sales of property or services. The court held that although the uniform fee was a one to one proportion, the compensation was still proportionate to the amount of vehicles sold, and was thus a commission under California law, exempting those sales consultants from overtime pay under California’s wage orders.

1 Case No. B219981, May 20, 2011, Ct. of Appeals, 2nd Appellate Dist., 1st Div.

2 California Labor Code § 204.1. The primary purpose of Labor Code § 204.1 was to permit car dealerships to pay their salespeople once a month instead of biweekly as imposed upon other California employers.

3 Ramirez v. Yosemite Water Co., (1999) 20 Cal. 4th 785.

Photo credit: Niko Guido

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.