By the end of this year all commission agreements in California must be in writing. When drafting or reviewing your commission agreement it is a good idea to keep in mind several issues; one of which is whether the commissioned employee is exempt from California’s overtime laws. A recent court decision (Muldrow v. Surrex Solutions) addresses the basic requirements of the inside salesperson exemption.
Let me start off by reminding you that there are two different possible sales-related exemptions under California’s overtime laws: inside sales persons and outside salespersons. Outside salespersons are exempt under most, if not all, wage orders. Inside salespersons are only exempt if the employment is governed by Wage Order 4 (professional, technical, clerical mechanical and similar occupations) or Wage Order 7 (mercantile industry). If some other wage order applies then the inside salesperson exemption is not available. There are several different distinctions between the inside salesperson and the outside salesperson exemptions that I hope to address in a subsequent article. For now, I want to focus on a couple of key points discussed in the Muldrow case.
Surrex Solutions Corporation locates and provides qualified candidates for employment to other companies. Sometimes the candidates are hired directly by the customer and other times Surrex “rents” the candidate to the customer for a specified billing rate. Surrex employees review open positions, research and locate qualified candidates, negotiate terms of employment/hiring with candidates and customers, and obtain orders from customers for the candidates. The Surrex employees are paid a percentage of any placement/hiring fees when the customer hires the candidate directly, and a percentage of the adjusted gross profit for candidates retained on a consultant basis. Tyrone Muldrow, on behalf of himself and other similarly situated employees, filed a class action against Surrex claiming he was entitled to overtime. The trial court and the appellate court rejected the claim and determined Muldrow was exempt from California’s overtime laws under the inside salesperson exemption.
The court emphasized several earlier cases distilling the necessary criteria for the inside salesperson exemption: “First, the employees must be involved principally in selling a product or service, not making the product or rendering the services. Second, the amount of their compensation must be a percentage of the price of the product or service.” (quoting Ramirez v. Yosemite Water Co (1990) 20 Cal.4th 785)
In addressing the first issue (i.e, was the employee involved principally in selling a product or service), the court reduced Muldrow’s job to its essence: Surrex employees would offer a candidate’s services to a client in exchange for a payment of money from the client to Surrex. Although there was some discussion regarding duties leading up to the consummation of the sale, all of those duties were part of the selling process and therefore the employees were “involved principally in selling a product or service.”
As to the second issue, the employees conceded that they were paid a percentage of the price of the product for the direct hires, but claimed that since the amounts paid on the non-direct hire cases was not based on the gross price of the product or service, it was not a commission. The court had no trouble rejecting this argument. Nothing indicates the percentage must be based on the gross price versus an adjusted gross or net price. The court similarly rejected the employees’ argument that the commission plan should be rejected because it was “too complex.”
An interesting issue that was not addressed by the court (and possibly not raised by either side) was the fact that the commissions are calculated by taking the gross profit then deducting ordinary costs of doing business in order to calculate the commission. There has been discussion for some time regarding the extent to which an employer can use the ordinary costs of doing business in the calculation of bonuses, commissions and profit-sharing agreements. The California Supreme Court has flip-flopped on the issue at least once. The latest rule is that, at least with respect to managerial profit sharing plans, an employer can calculate a profit sharing plan using profitability which necessarily includes the ordinary costs of doing business. Under Muldrow, it would appear an employer can also calculate a commission based on the ordinary costs of doing business (e.g., overhead, employee costs, benefit costs, etc.)
Commission plans can be simple or they can be complicated. Even simple commission agreements need to carefully consider a number of factors. Now that California law will require all commission agreements to be in writing and provided to the employee, it is extremely important for you to review and understand your commission arrangement. If your plan is not in writing, now is the time to start working on it with a knowledgeable professional. And don’t forget to consider any possible overtime ramifications!
Phillip J. Griego & Associates
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San Jose, CA 95113
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Original article by Robert E. Nuddleman of Phillip J. Griego & Associates
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