Most dealerships in California utilize a commission compensation structure in order to pay their sales staff. Doing so is generally allowed if the dealership complies with the myriad of laws dealing with this type of arrangement. The problem is that many dealerships run into costly issues when they do not properly calculate the pay due to their sales staff or properly document the relationship between them and their sales staff. This can lead to expensive litigation where not only is the dealership exposed to a single potential claim, but also to class actions and extraordinary attorneys’ fees awards.
In reviewing wage payment practices, a dealership must first ensure that their sales staff are properly classified and paid accordingly. California’s “inside sales exemption” generally applies to those employees “whose earnings exceed one and one-half (1 1/2) times the minimum wage if more than half of that employee's compensation represents commissions.” (Cal. Code Regs., tit. 8, § 11040; Industrial Welfare Commission Wage Order No. 4 3(d).) Currently, California’s minimum wage is $11.00 for employers with 26 employees or more and $10.50 for employers with 25 employees or less. (Cal. Lab. Code § 1182.12(b).) These amounts are scheduled to rise to $15.00 by 2022 and 2023, respectively. Further, the inside sales exemption only applies to each individual pay period where wages are actually paid. (Peabody v. Time Warner Cable, Inc. (2014) 59 Cal.4th 662.) Meaning that a dealership may not carryover sales made in another pay period to meet the exemption. (Id.) If the exemption does not apply to a particular pay period, the salesperson is treated as a non-exempt employee entitled to overtime. (See Cal. Lab. Code § 510.)
It is also worth noting that while an employee may be exempt for overtime purposes, that exemption is not absolute and that they still may be entitled to rest and meal periods, and compensation for failure to provide the same. (See Cal. Lab. Code §§ 226.7; Vaquero v. Stoneledge Furniture, LLC (2017) 9 Cal.App.5th 98, 115-116.)
Once it is determined that your sales staff, or part thereof, are at least partially exempt employees, the next step is to ensure that the relationship is properly documented. Cal. Lab. Code § 2751 states:
- Whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid.
The written and executed agreement must be provided to the sales person and the dealership must obtain and keep a signed receipt showing that the agreement was provided. (Cal. Lab. Code § 2751(b).) A best practice would be to hire a qualified individual to prepare your dealerships payrolls each pay period as well as counsel to draft the employment agreements for your sales staff. Violations of these rules could result in significant damages to your employees as well as penalties, fines, and attorneys’ fees. (Cal. Lab. Code §§ 201, 203, and 226, 510, 1194.) This is particularly concerning given that many dealerships fall into the trap of paying a flat rate per sale as a commission, when Cal. Lab. Code § 204.1, which is specifically applicable to dealerships, states that commissions must be “based proportionately upon the amount or value” of the vehicle being sold.
To avoid all of the issues in employment litigation, make sure your employees are properly classified, properly paid, and properly documented.
