Peabody v. Time Warner: CA Supreme Court Restricts Employer Commission Plans

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On July 14, 2014, in a unanimous decision authored by Justice Corrigan, the California Supreme Court held that employers cannot satisfy California’s compensation requirements by allocating commission wages paid in one pay period to other pay periods. Peabody v. Time Warner Cable, Inc., No. S204804 (July 14, 2014) (slip op. available here). Peabody narrowly construes the commissioned employee exemption and holds that neither California law nor Industrial Welfare Commission wage orders allows employers to decide how wages are allocated over pay periods.

The Peabody plaintiff was an account executive who alleged that because she was paid commissions only in some pay periods, she did not earn one and one-half times the minimum wage in the other pay periods, which is a requirement of the commissioned sales exemption under state law. Thus, in the weeks where she did not earn commissions, she was misclassified as exempt from overtime. The district court granted the defendant’s summary judgment motion and the plaintiff appealed to the Ninth Circuit; in 2012, the appeals court asked the state’s Supreme Court to answer the question as to whether employers could average commission payments over multiple pay periods when calculating minimum wage.

Time Warner paid commissions on the final biweekly payday of every month. It argued that the commissions could be allocated over the weeks of the preceding month to meet the exemption, but the California Supreme Court disagreed, stating that “all earned wages, including commissions, must be paid no less frequently than semimonthly.” Slip op. at 7. Further, “[w]hether the minimum earnings prong is satisfied depends on the amount of wages actually paid in a pay period. An employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall.” Id. at 7 (emphasis in original). The Court noted that requiring employers to actually pay the required minimum wages in each pay period protects employees and is consistent with the purpose of the minimum wage requirement: to mitigate the burden imposed by exempting employees from receiving overtime wages. It is also in line with the enforcement policies of the California Division of Labor Standards Enforcement which hold that employers cannot skirt the requirements of the commissioned employee exemption simply by deferring part of the wages due for one period until wages due for a later period are paid. “Although the DLSE’s enforcement policies are not entitled to deference . . . , we adopt its interpretation having independently determined that it is correct.” Id. at 9 (internal citations omitted).

The Court also dismissed the defendant’s argument that such wage attribution practices are permitted by federal law, stating that it previously warned employers against conflating federal and state labor law where the language or intent of state and federal laws are different: “[u]nlike state law, federal law does not require an employee to be paid semimonthly . . . . It also permits employers to defer paying earned commissions so long as the employee is paid the minimum wage in each pay period. In light of these substantial differences . . . , reliance on federal authorities to construe state regulations would be misplaced.” Slip op. at 9 (internal citations omitted).

Peabody will be sent back to the Ninth Circuit, which is expected to revive the putative class action and remand back to the district court.