By Cathleen S. Yonahara, Freeland Cooper & Foreman LLP

Rest period violations are a source of enormous potential liability for employers, so it's critical to ensure that you are appropriately compensating employees for their rest periods. A California appellate court recently tackled the issue of whether commissioned employees are entitled to separate compensation for rest periods and whether that requirement may be satisfied by paying them a guaranteed minimum hourly rate as an advance on commissions.

Employees Paid Guaranteed Minimum Hourly Rate

Two former sales associates, Ricardo Bermudez Vaquero and Robert Schaefer, filed a class action lawsuit against their former employer, Stoneledge Furniture, LLC, alleging the company's commission pay plan didn't comply with California law. Stoneledge paid sales associates under a "Sales Associate Commission Compensation Pay Agreement."

According to the agreement, if a sales associate earned less than $12.01 per hour in commissions in any pay period, Stoneledge paid him a draw against future advanced commissions. The agreement provided: "The amount of the draw will be deducted from future Advanced Commissions, but an employee will always receive at least $12.01 per hour for every hour worked."

Sales associates were not separately compensated for time during which they weren't selling, such as time spent in meetings, on certain types of training, and during rest periods. They clocked in to the timekeeping system at the start of each shift, clocked out and back in for meal periods, and clocked out again when their shifts ended.

Stoneledge permitted sales associates to take rest periods of at least 10 consecutive minutes for every 4 hours they worked (or when they worked a major fraction of a 4-hour shift) and didn't require them to clock out for such breaks.

Failure to Provide Paid Rest Periods Alleged

Vaquero and Schaefer filed a class action in which they alleged Stoneledge failed to provide paid rest periods under Labor Code Section 226.7 and Industrial Welfare Commission (IWC) Wage Order 7, failed to pay all wages owed upon termination under Section 203, and committed unfair business practices. They requested declaratory relief.

Stoneledge argued that its sales associates were paid at least $12 an hour even if they made no sales at all. Although the company deducted from sales associates' paychecks any previously paid draw on commissions, it claimed that such "repayment [was] never taken if it would result in payment of less than the [minimum pay of $12.01 per hour] for . . . all time worked in any week."

Stoneledge asked the court to dismiss the case without a trial because it paid its sales associates a guaranteed minimum rate for all hours worked, including rest periods; there was no willful failure, which is required for a violation of Section 203; and the unfair business practices claim was based on the other two claims, which failed as a matter of law.

The trial court found that because Stoneledge guaranteed that sales associates would be paid more than $12 an hour for all hours worked, "there was no possibility that the employees' rest period time would not be captured in the total amount paid each pay period." Without examining the merits of the remaining claims, the trial court concluded that they all failed because they were derivative of the failed rest period claim. The court entered judgment in favor of Stoneledge. Vaquero and Schaefer appealed.

California Law on Rest Periods

Labor Code Section 226.7 states: "An employer shall not require an employee to work during a meal or rest or recovery period mandated pursuant to an applicable statute, or . . . order of the [IWC]." Under that provision, if an employer fails to permit an employee to take a meal or rest period in accordance with state law, the employer shall pay the employee one additional hour of pay at his regular rate of compensation for each workday the meal or rest or recovery period was not provided. Wage Order 7 provides:

Every employer shall authorize and permit all employees to take rest periods, which insofar as practicable shall be in the middle of each work period. The authorized rest period time shall be based on the total hours worked daily at the rate of ten (10) minutes net rest time per four (4) hours or major fraction thereof. However, a rest period need not be authorized for employees whose total daily work time is less than three and one-half (3-½) hours. Authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages.

The appellate court held that contrary to the trial court's conclusion, Wage Order 7 requires Stoneledge to separately compensate its sales associates for their rest periods. In a 2013 decision, Bluford v. Safeway Stores, Inc., the court held that the Wage Order requires employers to separately compensate employees for rest periods when they use an "activity-based compensation system" that doesn't directly compensate for rest periods.

Safeway paid its drivers based on mileage rates applied according to the number of miles they drove, when they made the trips, and where the trips began and ended. Safeway argued that it intended to pay drivers for their rest periods, and its compensation system subsumed those payments into the mileage rates it negotiated in the drivers' collective bargaining agreement.

However, none of the bases on which Safeway paid its drivers directly compensated them for their rest periods. The court found Safeway's compensation system violated California law because the drivers weren't separately compensated for their rest periods.

In another case, Armenta v. Osmose, Inc., which was decided in 2005, the court held that employers cannot comply with their minimum wage obligations by averaging wages across multiple pay periods. Rather, the minimum wage standard applies to each hour worked by employees for which they were not paid.

In that case, the employer's plan paid employees only for "productive" time and not for "nonproductive" time, such as time spent traveling between jobsites. The court held that California Wage Orders require employers to compensate employees for "all hours," including nonproductive time, "at the statutory or agreed rate[,] and no part of this rate may be used as a credit against a minimum wage obligation."

Ultimately, the appellate court concluded that Wage Order 7 requires employers to separately compensate employees for rest periods if their compensation plan doesn't already include a minimum hourly wage for such time.

Commission Plan Didn't Separately Compensate Employees for Rest Periods

Stoneledge argued that its commission plan complied with California law by "counting as hours worked" the time sales associates spent taking rest breaks and by not deducting from wages for those hours. The appellate court acknowledged that Stoneledge treated "break time identically with other work time"; however, the formula it used for determining commissions didn't include any component that directly compensated sales associates for their rest periods.

Rather, Stoneledge multiplied weekly delivered sales (minus returns and credits) by an applicable commission rate and paid that amount if it exceeded the minimum contractual rate. The commission agreement didn't compensate for rest periods taken by sales associates who earned a commission instead of the guaranteed minimum.

If a sales associate's commissions did not exceed the minimum rate in a given week, Stoneledge deducted from his future paychecks any wages advanced to compensate him for hours worked, including rest periods. The appellate court concluded that the "advances or draws against future commissions were not compensation for rest periods because they were not compensation at all. At best they were interest-free loans. . . . [T]aking back money paid to the employee effectively reduces either rest period compensation or the contractual commission rate, both of which violate California law."

When Stoneledge paid an employee only a commission, the commission didn't account for rest periods, and when the company paid an employee on an hourly basis (including for rest periods), it took back that compensation in later pay periods. In both situations, the employee wasn't separately compensated for his rest periods.

The appellate court found that the trial court erred in granting judgment in favor of Stoneledge on the claim alleging violations of Section 226.7 and directed the trial court to rule on the merits of Vaquero and Schaefer's other causes of action. Vaquero v. Stoneledge Furniture LLC (California Court of Appeal, 2nd Appellate District, 2/28/17).

Bottom Line

Review your commission-based compensation plans to ensure that you separately account for and pay employees for rest periods in compliance with California law. It isn't sufficient for a commission plan to pay employees a guaranteed minimum hourly rate as a draw against their future commissions.

Cathleen S. Yonahara, an editor of California Employment Law Letter can be reached at Freeland Cooper & Foreman LLP in San Francisco, yonahara@freelandlaw.com.