Commission-Only Employees Are Not Exempt from Overtime

The Facts

Defendant Wedbush Securities, Inc. is a securities broker-dealer firm that provides financial planning and investment products through financial advisors. Wedbush classified its financial advisors as exempt from overtime requirements under the administrative exemption. Wedbush paid its financial advisors on a commission-only basis for total monthly gross product sales pursuant to a commission schedule ranging from 20% for sales between $0 and $6,999 and 32% to 35% for sales between $10,000 and $12,499.

In the event that a financial advisor’s commissions in a given month were less than double the California minimum wage, Wedbush paid the financial advisor his/her commission plus a “draw” or advance on future commissions. However, Wedbush also expected its financial advisors to repay the draws and reduced future commissions until repayment was made.

There was conflicting evidence regarding the requirement to repay draws on termination from the company. A compensation agreement gave the company the right to set-off any all amounts owed by the employee from any compensation due, with the employee still being responsible for any remaining indebtedness after termination, or, at the option of Wedbush, to sign a promissory note payable to the company. However, a conflicting declaration signed by the director of human resources stated that the company forfeited its right to recoup any outstanding portion of the draw upon termination.

Following a bench trial, the trial court held that Wedbush’s compensation structure satisfied the administrative exemption’s salary basis test, and an appeal followed.

The Court’s Opinion

The Court reviewed the requirements for meeting the administrative exemption under California law: the employee must be (1) primarily engaged in exempt duties, and (2) earn a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. Noting that neither Labor Code § 515 nor Wage Order 4 define salary basis for purposes of the exemption and that California courts follow the federal salary basis test and look to the federal regulations for guidance, the Court relied on 29 C.F.R. section 541.602(a)(3)(2019), which provides that up to ten percent of salary may be satisfied by payment of commissions. Based on this language the court concluded that a commission-only compensation plan does not satisfy either the federal or California salary basis test.

Relying on 29 C.F.R. section 541.602(a) and Negri v. Koning & Associates, 215 Cal.App.4th 392 (2013), the  Court further noted that an employee must regularly receive a predetermined amount which is not subject to reduction because of the variations in the quality or quantity of the work performed by the employee. The Court found that Wedbush’s financial advisors earned less if they sold fewer products, and, therefore, their commissions could not be considered a salary. Similarly, the draws advanced were not wages but loans because all conditions for performance had not been satisfied.

Finally, the Court found that if a Wedbush financial advisor was terminated, he or she might net-zero compensation if forced to repay the draws advanced. This would violate both the salary basis test and the California minimum wage requirements.

The Court noted in dicta that the issue presented to it was not whether paying a base salary of at least twice the minimum wage plus commissions satisfied the salary basis test, and that, if it was, the Court might well reach a different conclusion. Although not binding, this suggests that base salary plus commission compensation plans are likely to meet the federal and California salary basis test.

What This Means for Employers

Commission only compensation plans are no longer compliant with either the federal or California salary basis test and minimum wage laws. Employers with commission only plans may have significant exposure to penalties for violation of wage laws and to class action and PAGA litigation.

Actions to Take

• Employers with commission-only compensation plans should immediately convert them to a plan compliant with the California salary basis test.
• Employers should consider paying a base salary of at least twice the minimum wage, plus commissions, with no repayment requirement for the base salary.
• Employers should consider paying additional consideration and obtaining a release of claims as part of the conversion to a new compensation plan in order to avoid claims and litigation.
• Employers should make certain that their written compensation plans are consistent with their custom and practice, are signed by both parties and retained in the personnel file.