New Favorable Interpretation of “Commissions” for Commissioned Salesperson Exemption
The California Second Appellate District recently issued an opinion that favorably expanded the definition of "commission wages" for employers who exempt their sales force from overtime requirements under the commissioned salesperson exemption.In Areso v. CarMax, Inc., the Court held that CarMax's commission plan that pays its salespeople a uniform payment for each used car sold (in addition to other components not at issue in the opinion) qualifies as "commission wages" for purposes of the commissioned salesperson exemption.
Plaintiff Areso filed a putative class action lawsuit, alleging misclassification and failure to pay overtime wages because her employer's commission plan did not qualify as "commission wages" under Labor Code Section 204.1, which requires commissions to be "based proportionately on the amount or value" of the sale of the employer's property or services. The trial court granted CarMax's motion for summary adjudication, finding CarMax's compensation arrangement is a "performance-based incentive system and thus fairly understood to be a commission structure" based on the statutory language that commissions may be based on the "amount" rather than "value" of vehicles sold, construing "amount" to mean the number of vehicles sold. The Court of Appeal agreed and affirmed the summary adjudication order, agreeing with CarMax's argument that prior decisions requiring commissions to be based on "a percentage of the price of the product or service" (as first articulated in Keyes Motors, Inc. v. DLSE, 197 Cal.App.3d 557, 563 (1987)) as dicta as it related only to the part of the statutory language in Labor Code § 204.1 interpreting the "value" of the product or service.
The Areso Court confirmed the two-part inquiry adopted in Keyes Motors and later endorsed by the California Supreme Court in Ramirez v. Yosemite Water Co., 20 Cal.4th 785, 794-95 (1999). To qualify for the commissioned salesperson exemption, the employee: (1) must be involved principally in selling a product or service (not making a product or rendering a service); and (2) the amount of their compensation must be based proportionately on the amount or value of the product or service. However, the Areso Court distinguished this case from other cases where the employer's commission plan was held not to constitute commission wages because those cases interpreted whether the commissions were based on the "value" of the product or service. For example, commissions that were based in part on winning sales contests (in Harris v. Investor's Business Daily, Inc., 138 Cal.App.4th 28 (2006)) did not qualify as commission wages. The Court noted no other court has construed the word "amount" in the statute, and that CarMax's payment of a flat dollar figure for each vehicle sold satisfies the statutory requirement because the commissions are paid based on the "amount" or number of vehicles sold. Further, paying a uniform fee for each vehicle is "proportionate" because it is a one-to-one proportion where the "compensation will rise and fall in direct proportion to the number of vehicles sold."
This case is a good development for employers who classify their sales employees as exempt commissioned salespeople and compensate them with commission plans that may have various components, including a "flat fee" component. As this is a new interpretation and development, it remains to be seen whether other courts will follow the Areso Court's lead.