Dealerships are taking another look at their commission pay plans in light of the recent California Court of Appeal case of Vaquero v. Stoneledge Furniture, LLC., which we featured in our March 1, 2017 Alert article. The Vaquero Court held that commission pay plans providing base pay covering time spent on rest breaks that could be “clawed-back” subject to future earnings was invalid under California law. Specifically, the Court held that employees who earn only commissions must be paid separately for rest breaks (since the commissions do not cover time spent resting), and that employers who pay employees both hourly wages and some form of incentive pay, including commissions, violate the rest period pay requirement if they claw back any part of the employees’ base hourly pay as a draw or advance against commissions.
In the wake of Vaquero, Employers who have commission-only pay plans that do not separately compensate employees for time spent on rest breaks have been evaluating their compliance options. Although Vaquero only addressed separate pay for time spent on rest breaks, the underlying logic of the authority on which Vaquero relied would apply to all time in which the employee was not engaged in productive (i.e., non-sales) activity. As such, many dealerships have moved to pay plans that provide base hourly pay for all clock hours recorded plus commission/ incentive pay. Another option could be to pay commission employees separate hourly pay of at least minimum wage for any time spent on non-sales activity, however, tracking and reporting such time could be administratively onerous, and defining non-sales activity could be difficult especially if a Court did not agree with the parameters of the definition set by the employer.
Another unresolved question raised by Vaquero is whether pay for rest breaks should be calculated at a minimum rate that could differ from base hourly pay. This question is inevitable in light of the recent statutory requirements of AB 1513 to pay piece-rate employees separately for rest/recovery breaks at a “regular rate” that factors in any pay earned beyond just a base minimum wage rate. In anticipation of the possibility that commission pay obligations are moving down the same path as those for piece-rate pay (clearly telegraphed by the Vaquero court), some dealerships are already offering separate rest/recovery pay for commission-paid employees using the same calculation method as for piece-rate employees, such as technicians, flat-rate detailers and other piece-rate employees under AB 1513. Dealerships could also offer a different fixed rate of pay based on the number of applicable 10-minute rest periods, which could then be supplemented in the event that the employee incurs any heat recovery breaks.
These options are only some of the more common structures considered by dealerships, and there is certainly no “one size fits all” solution for this issue. In addition, dealerships should keep in mind that this decision affects not only commissioned sales department employees, but other commission-paid employees, including but not limited to, service advisors and parts counterpersons.
While diverse alternatives are taking shape for dealers in approaching commission pay plans, it is still a nebulous area and numerous pending court cases related to commission pay plans in the industry are likely to further shape this area in the not-so-distant future. At the present time, we strongly recommend that dealerships using commission-only pay plans or those that provide base hourly pay that is subject to reduction through a draw component immediately cease using them and seek legal advice. This is a rapidly-changing area, and we will provide further updates on future developments.