Another state court has issued an overtime exemption ruling that has California employers celebrating. Late last year (in Harris v. Superior Court), the state Supreme Court reversed the Court of Appeals’ narrow interpretation of the administrative exemption. Now the Court of Appeals has rejected an overly restrictive interpretation of the commissioned employee exemption, providing a helpful roadmap for how employers can make sure their salespeople qualify for the exemption.

Recruiters Sue for Overtime
"Max" was an employment recruiter for El Segundo-based Surrex Solutions Corporation. His primary job duty was to recruit candidates for employer clients. After a client placed a job order, Max and other recruiters used various resources to find candidates, including an internal database and online job boards. Surrex was paid by its clients only when a candidate was successfully placed.

Max sued Surrex on behalf of a class of former and current recruiters, alleging the company failed to pay them overtime. The trial court determined that the class members were subject to the commissioned employee exemption and ruled for the employer. The employees appealed.

The Commissioned Employee Exemption
Section 3(D) of Wage Orders 4 (Professional, Technical, Clerical, Mechanical, and Similar Occupations) and 7 (Mercantile Industry) provides an exemption from the overtime requirement for “any employee whose earnings exceed one and one-half (1 ½) times the minimum wage if more than half of that employee’s compensation represents commissions.”

A California Supreme Court case established a two-part test for “commission wages.” Under that test, compensation qualifies as commission wages only if:

• The employees are involved principally in selling a product or service, not making or providing the service; and
• The amount of their compensation is a percentage of the price of the product or service.

Court Upholds the Exemption
The employees argued that that they were not subject to the exemption because 1) they were not primarily engaged in sales, 2) their commissions were not based on price, and 3) Surrex’s compensation plan was not a bona fide commission system. The Court of Appeals disagreed on every count, as laid out below.

The employees were engaged principally in sales.The court found that a Surrex recruiter’s job, “reduced to its essence,” was to offer a candidate’s services to a client in exchange for a payment of money—and this met the ordinary definition of the word “sell.” Because only the successful placement of a candidate generated revenue for the employer, the court didn’t buy the employees’ argument that only the time they spent finding clients to promote job candidates to qualified as sales.

The court shot down the employees’ contention that time spent “searching on the computer, searching for candidates on the website, cold calling, interviewing candidates, inputting data, and submitting resumes” wasn’t sales-related. To the contrary, it said, those activities were fundamental prerequisites for making a sale.

The employees’ commissions were sufficiently related to price. The employees claimed the pay they received under Surrex’s commission system didn’t qualify as commissions under the exemption because the formula was based on several cost-related factors in addition to price. The court, however, held that the system fully comported with the “essence of a commission”—a payment based on sales, “decoupled from the actual time worked.”

The court found no basis in law for requiring employers to calculate commissions based solely on a straight percentage of profits. Further, in this case, a commission system based solely on revenue or price would fail to reward employees who helped the employer achieve greater profits by limiting costs.

The compensation plan was a bona fide commission system.The employees argued that consistent commission earnings below, at, or near the draw indicate that a commission plan is not bona fide; a draw is an advance on commissions to be earned in the future. But the court found that a sufficient number of recruiters were consistently paid amounts that exceeded their guaranteed draws and concluded that the plan was indeed a bona fide commission system. Muldrow v. Surrex Solutions Corp., Calif. Court of Appeals (Dist. 4) No. D057955, (2012).

Review Your Own Compensation Plan
Now is a great time to examine your own plan for commissioned workers and see how it stacks up against the Court of Appeals’ analysis in this case: Do the workers spend most of their time on sales or essential sales-related activities? Are their commissions related at least in part to revenue or price, and not to time worked? Do a significant number of workers regularly earn more than their guaranteed draws?

Practice Tip: It’s possible that a commissioned employee could be exempt from state overtime provisions but not federal overtime provisions.