Does your California company have to pay minimum wage and overtime to its commissioned salespeople? The answer depends on a number of factors, including the type of work the employees do, how much they are paid, and how often.
In general, California employers must pay employees at least the minimum wage for every hour worked. (California's minimum wage is scheduled to increase every year until 2023; find the current minimum wage in our article on California wage and hour laws.) California employers must also pay employees overtime when they work more than a certain number of hours in a day or week:
However, these rules don’t apply to all employees. If an employee fits into an exemption, the employer doesn’t have to comply with minimum wage or overtime rules. Exemptions are intended to be narrow exceptions to the usual rules. For employees in sales, the two exemptions most likely to apply are for commissioned salespeople and outside salespeople.
Two California Wage Orders, issued by the California Industrial Welfare Commission, create an exemption specifically for commissioned salespeople. However, the exemption (sometimes called the "inside sales" exemption) is available only for employees who work in retail or the professional, technical, clerical, mechanical, and similar occupations.
Employees in these industries qualify as exempt if both of the following are true:
The California Supreme Court recently held that these minimum pay requirements apply for each pay period. In other words, an employer may not average out an employee’s earnings over a month or year to determine whether the employee earns at least 1.5 times the minimum wage. Instead, the employee must earn 1.5 times the minimum wage per hour in each pay period.
If your company pays commissions only sporadically, such as monthly or quarterly, it will need to make sure that employees receive a base pay of at least $13.50 an hour (1.5 times the current minimum wage).
If your employees work in outside sales, they may fit into a different exemption. An outside salesperson is someone who regularly and customarily spends at least half of his or her time away from the employer’s place of business, selling products or getting orders or contracts for services, products, or the use of facilities.
Courts have differentiated between time spent actually selling, or preparing to sell, and time that is “incidental” to sales. For example, according to a California Supreme Court case, delivering items that have already been purchased does not count as sales time. However, loading up a vehicle with sample products and informational material does count as sales time.
As you can see, there are a few gray areas when it comes to classifying sales employees as exempt. And, when it comes to wage and hour laws, making a classification mistake can be very costly. You may end up having to pay not only the overtime or minimum wages you owe, but also penalties, attorneys' fees, court costs, and more. If you have commissioned employees on your payroll, it’s a good idea to talk to an experienced California employment lawyer, who can help you properly classify your employees.
California law also requires employers to follow other rules for employees who receive commissions, including creating a written commission plan. For more information, see Getting Paid by Commission in California.