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Commissioned Inside Sales Employee Exemption
Wage Order 4 (Professional, Technical, Clerical, Mechanical and Similar Occupations) and Wage Order 7 (Mercantile Industry) contain exemptions for some commissioned sales employees. However, the exemption is from overtime, not from the other requirements of the wage orders...such as minimum wage, meal and rest breaks and tracking hours worked.
Generally, the exemption applies if:
  • The employee earns more than 1.5 times the minimum wage; and
  • More than half of the employee’s compensation represents commission earnings.
  • This is a narrow exemption. Consult legal counsel with any questions regarding whether your inside sales employees meet the commission exemption.
Minimum Earnings Requirements
The California Supreme Court held that an employer satisfies the minimum earnings requirement for this exemption only if the employer actually pays the required minimum earnings of 1.5 times the minimum wage for the hours worked during each pay period. An employer may not allocate wages paid in one pay period to a prior pay period to cure a shortfall. The court adopted the Division of Labor Standards Enforcement’s (DLSE) guidance on this issue, which provides that to meet the first prong of this exemption:
  • The employee must earn more than 1.5 times the minimum wage for each hour worked during the pay period. This requirement must be met for each workweek in the salesperson’s pay period, whether actual commissions or a guaranteed draw against commissions.
  • The payment of the earnings of more than 1.5 times the minimum wage for each hour worked must be made in each pay period. Therefore, wages due for one period of payment cannot be deferred to meet the minimum wage for a later period.
  • Compliance with the exemption is determined on a workweek basis. The minimum exemption compensation must be satisfied in each workweek and paid in each pay period.

The current minimum wage is $9 an hour. To qualify for this exemption, an individual would need to receive in each pay check more than $13.50 per hour worked during the applicable workweeks covered by that paycheck. If you pay commissions less than twice a month, make sure your base wages cover this test.
Commissions Requirements
  • The second prong of this exemption is met if commission wages represent more than 50 percent of the employee’s overall compensation.
  • The California Supreme Court did not decide this issue in the Peabody case. DLSE guidance (which is not binding on courts) states that:
  • The earnings from commissions must be more than 50 percent of total earnings for each workweek. However, according to the DLSE, the actual determination of compliance can be deferred until the reconciliation date following the end of the second pay period.
  • Overtime is due for any week in which the earnings from commissions are less than 50 percent of total earnings for the workweek.
  • The California test as to whether or not a compensation plan meets the bona fide commission plan requirement looks at a period of time of at least one month.
  • Commission earnings below, at or near the draw indicate that a commission plan is not bona fide. If the commission plan is invalid, overtime will be due for all weeks in which the exemption was claimed, but not met.
  • Employers that believe they qualify for the state overtime exemption will still need to verify that they meet the exemption under the federal Fair Labor Standards Act (FSLA), which has different exemption requirements and also does not use the same definition of “commissions” that is used in federal law.