Not only does the California prohibition on wage averaging apply to hourly and piece-rate systems, in late 2012, the U.S. District Court for the Southern District of California held that the prohibition extends to commission-based systems as well.
In Balasanyan v. Nordstrom, Inc., a class of sales person employees challenged defendant Nordstrom’s commission-based compensation plan. Under Nordstrom’s plan, at the end of each pay period, Nordstrom calculated each salesperson’s commissions and compared the commissions to the amount they would have earned had they been working at an hourly rate.
If an employee’s commissions equaled or exceeded the hourly rate, Nordstrom paid the commissions. If not, Nordstrom paid the commissions plus the amount necessary to bring the employee to the guaranteed minimum rate for the time the employee spent selling. Although Nordstrom paid its salesperson a separate hourly rate for “non-sell” time (more than 30 minutes of stocking and more than 40 minutes of pre-opening and post-closing time), Nordstrom included 30 minutes of stocking and 40 minutes of pre-opening and post-closing time into each employee’s “selling” time. However, Nordstrom did not separately compensate its salespeople for this time. Thus, the plaintiff-employees alleged that Nordstrom underpaid its salespeople because it did not separately compensate them for 30 minutes of stocking and 40 minutes of pre-opening and post-closing time, and instead included this time in commissions.
Nordstrom argued that its commission system was lawful. According to Nordstrom, the relevant wage order permits employers utilizing a commission-based system to pay its employees commissions for all hours worked, even if some of the work is not directly related to selling. In the alternative, Nordstrom argued that it could pay commission to compensate its salespeople for non-selling time as part of the services provided in connection with sales.
Nordstrom also contended that its employment agreement, which sets forth its compensation plan, should govern.
Agreeing with the plaintiff-employees, the court found that under Armenta, “employees must be directly compensated at least minimum wage for all time spent on activities that do not allow them to directly earn wages.” The court noted that even though Armenta did not specifically discuss commissions, the case applied to Nordstrom’s commission-based system because “Nordstrom’s employees are not being compensated directly for stocking, pre-opening, or post-closing time, during which they usually cannot earn a commission. Thus, Armenta dictates that because the employees are not being compensated for those activities, the compensation plan violates California law. As to Nordstrom’s second argument, the court noted that other cases, including Cardenas, held that activities that are indirectly related to the commission- or piece-rate based work must be separately compensated. Additionally, the court disregarded the fact that the employees had agreed to be compensated in this manner,because “neither employers nor employees ‘may contract away an employee’s right to earn minimum wage for each hour worked.”
After Balasanyan, employers must separately compensate their commission-based employees for all non-selling time, i.e., time not directly related to earning a commission.