California Court Says Professional Recruiters Are Exempt Commissioned Salespersons
In Muldrew v. Surrex Solutions, a California court held this week that certain professional recruiters qualified for California’s commissioned salesperson exemption, thereby defeating their claim for alleged unpaid overtime wages. Surrex Solutions is in the business of recruiting—locating qualified candidates to fill job positions for Surrex’s clients. The plaintiffs in the case worked as recruiters for Surrex. In that capacity, they located qualified candidates and tried to place them with Surrex clients. Surrex’s clients paid Surrex a fee (generally a percentage of a placed employee’s annual compensation) if they hired a candidate proposed by Surrex. Surrex in turn paid the recruiter a percentage of the fee as “commission.” The plaintiffs in Surrex filed a lawsuit alleging that they worked overtime hours without being paid overtime compensation. Surrex defended the suit on the ground that the recruiters were exempt commissioned salespersons and not entitled to overtime compensation under California law.
California’s commissioned salesperson exemption provides an exemption from overtime pay for employees who earn more than one and one-half times the minimum wage and whose total compensation is derived more than 50% from commissions. Courts have held that in order to qualify for the exemption, an employee must be principally engaged in sales duties and must be paid a percentage of the price of goods sold. The plaintiffs in the case argued that they did not meet the test for exemption because they were not engaged in “sales” and their pay was not based on a percentage of the price of a product. The court rejected both arguments.
First, the court held that the recruiters’ job duties constituted “selling” within the meaning of the exemption. The recruiters’ job was essentially to locate and “sell” a candidate to Surrex clients. The court further held that job duties such as researching candidates and meeting with them were directly related to and part of their sales duties.
Second, the court held that Surrex’s method of paying its recruiters satisfied the definition of “commission” pay. Surrex placed two types of candidates with its clients: employees and consultants. If a candidate was hired as an employee by a Surrex client, then Surrex received a flat fee for the placement and in turn paid a percentage of that fee to the recruiter. The plaintiffs conceded that this payment qualified as a “commission” for purposes of the exemption. The plaintiffs, however, challenged the payment system used in the case of a consultant who was placed with a client. In the case of consultants, Surrex employed them and provided their services to clients based on hourly rates. Surrex then paid the recruiter a percentage of the “adjusted gross profit” earned by Surrex (revenue minus Surrex’s costs associated with employing the consultant). The plaintiffs argued that because the formula considered factors other than a straight percentage of the fee, it could not be considered commission pay. The court rejected this argument, holding that the concept of commissions is broad enough to include a formula such as Surrex’s that takes into account a reduction for overhead in calculating commission pay.
Finally, the court rejected the plaintiffs’ argument that Surrex’s commission plan was not really a bona fide commission plan because it involved paying the recruiters a guaranteed draw against commissions. The plaintiffs argued that the plan was designed in a way to ensure that recruiters would essentially earn close to the amount of the draw. The court rejected this argument, holding that Surrex produced evidence showing that recruiters’ commission often far exceeded the draw amount. The court held that this evidence was sufficient to support a finding that Surrex’s commission plan was a bona fide commission plan.
The Muldrow v. Surrex decision is a positive one for California employers, in that it rejects an overly restrictive interpretation of elements of the commissioned salesperson exemption. Employers who rely on the exemption for certain employees are reminded, however, that satisfying the exemption is more complex than it seems. Given the litigation climate in California concerning overtime exemptions, it is advisable to have commissioned salesperson classifications reviewed by counsel.