For many businesses, a commission-based workforce seems like a win-win arrangement. Employees do not have a cap on how much they can earn while employers get the benefit of a motivated workforce and no guaranteed salaries for underperforming employees. Semprini v. Wedbush Securities, Inc. No. G057740 2020 Cal.App. LEXIS 1061, is a cautionary tale that commission only employees are not exempt from overtime. In Semprini, two financial advisors brought a class action claim against Wedbush Securities, Inc. (“Wedbush”) for unpaid overtime. At trial, the trial court determined that the financial advisors were properly classified as exempt employees and, therefore, not entitled to overtime compensation. The appellate court reversed the trial court’s decision.
Wedbush argued that its financial advisors could be classified as administrative employees, exempt from overtime requirements. The California Labor Code authorized the Industrial Welfare Commission (“IWC”) to establish wage orders. The wage orders determine which employees can qualify as exempt within a variety of employment classifications. For example, wage order no. 4-2001 governs “persons employed in professional, technical, clerical, mechanical, and similar occupations,” and applied to the financial advisors in Semprini.
Wage order 4-2001 provides for three types of exemptions: (1) executive exemptions; (2) administrative exemptions; or (3) professional exemptions. Semprini dealt with the administrative exemption and holds that an employee may be exempt “if that employee (1) is primarily engaged in exempt duties and (2) earns a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employees.” The parties stipulated that the financial advisors were engaged in exempt duties, so the only issue was whether the financial advisors earned at least twice the state’s minimum wage.
Wedbush’s Salary Structure
Wedbush’s financial advisors were paid solely on commissions. The commission percentage varied depending on the amount of gross product sales per month. If the amount of commission payments each month was not at least double minimum wage, “Wedbush pays the financial advisor the commission due plus a ‘draw’ – or advance on further commission – in an amount equal to the difference between the commission and double the minimum wage.” Financial advisors forced to take a draw were indebted to Wedbush until the draw amount was repaid. Wedbush presented contradictory evidence as to whether the indebtedness remained, even if employment ended. Wedbush’s written policy stated that the indebtedness continued after employment ended, but Wedbush’s Director of Human Resources submitted a declaration stating that Wedbush forfeited its right to recover these amounts on termination.
Wedbush’s Salary Structure Did Not Qualify for the Administrative Exemption
The appellate court focusing on the word “salary” in the wage order and held that “salary is generally understood to be a fixed rate of pay as distinguished from an hourly wage.” A salary is “a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.” A recent California amendment stated that up to ten percent of salary may be “payment of nondiscretionary bonuses, incentives and commissions…”
With this backdrop, the court concluded that Wedbush’s compensation plan based solely on commission with a draw against future commissions did not qualify as a salary. The financial advisors were not receiving a set salary, and more than ten percent of the compensation was commission. Wedbush’s policy of permitting financial advisors to take a draw was not a salary, but rather a loan. Because of this, Wedbush’s financial advisors were misclassified as exempt employees and were entitled to overtime compensation.
The Semprini decision is a reminder that employers must use extreme care when classifying employees as exempt. Only employees who meet the specific exemptions under the applicable wage order can be classified as exempt. Misclassifying an employee as exempt can be costly. Employers who misclassify employees may be responsible for paying substantial back wages for unpaid overtime and may be assessed severe penalties.
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Matthew Wallin is a senior associate in the Los Angeles office where he practices labor and employment law. He has extensive experience defending private business and public entities in litigation involving discrimination, harassment, retaliation, and wage and hour disputes. He has also defendant against assault and workplace violence claims.
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