Manhattan Appeals Court Rejects Senior Executive's Claim for Alleged Unpaid Incentive Compensation

Posted on August 31, 2011 by Noel Tripp

Pursuant to New York State Department of Labor guidance and New York case law, incentive compensation is not considered “wages” unless it is “earned.” See generally Truelove v. Northeast Capital & Advisory, Inc., 95 N.Y.2d 220, 225 (2000). Accordingly, disputes over an employee’s entitlement to incentive compensation in New York often turn on whether a particular bonus, or other type of incentive payment has been earned, and thus become “wages” which may not be subject to subsequent forfeiture or nonpayment. Recently, the Appellate Division’s First Department, which sits in review of the trial courts in Manhattan, rejected an executive’s claim under Article 6 of the New York Labor Law for such a payment. Cuervo v Opera Solutions LLC, 2011 NY Slip Op 6197 (1st Dep't Aug. 11, 2011).

In Cuervo, a majority of the appellate panel ruled that because the executive level employee’s offer letter had reserved to the employer the right to modify the commission schedule, the plaintiff had no claim to further commission payments based on the employer’s unilateral modification (provided, of course, that minimum wage and overtime requirements were met). The dissent focused on whether the plaintiff was an executive or administrative employee who would be categorically exempt from the payment-of-wages protections of Article 6 of the Labor Law (and whose entitlement to any further compensation would thus be limited to his remedies under contract law).

As litigation over incentive payments continues to expand, to ensure compliance with the law and avoid costly disputes over incentive compensation. all employers should regularly review their incentive compensation programs and agreements to ensure they clearly state when any such potential incentive compensation is ”earned.”

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California Court of Appeal Upholds Applicability of State Commission Exemption to Sales Consultant

Posted on July 12, 2011 by Noel Tripp

As we have previously discussed, the FLSA contains an exemption for commissioned employees in the retail or service industry who meet certain parameters: colloquially referred to as the “7(i)” exemption. California has a similar exemption which the California Court of Appeal, Second Appellate District recently applied to a sales consultant, holding that Defendant’s payments qualified as “commissions.” Areso v. Carmax, Inc., 195 Cal. App. 4th 996 (Cal. App. 2d Dist. 2011). 

Plaintiff Areso was engaged in selling defendant’s “used vehicles, warranty plans, used vehicle appraisals and vehicle accessories,” and received payments based on the products and services she sold. At issue were two different versions of Carmax’s sales consultant pay plan for California employees.  Under both, plaintiff was eligible to receive a fixed amount per sale of a car, and then a percentage of the purchase price of accessories sold. The trial court ruled both of these “per vehicle” pay plans were “a performance-based incentive system and thus, fairly understood to be a commission structure under Labor Code § 204.1.” Id. at 1000.

Areso appealed. The Court of Appeal began its analysis by noting that Wage Order 7-2001 exempts from California Labor Code overtime requirements “any employee whose earnings exceed one and one-half times the minimum wage if more than half of that employee’s compensation represents commissions.” Id. at 1002-3. This exemption mirrors 7(i), but without the requirement that the employee be in a “retail or service” industry. The court observed that the Cal. Labor Code also contains a definition of commission wages, namely “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.” Id. citing Labor Code § 204.1 (emphasis in original). 

The Court then analyzed previous California appellate authority addressing other types of incentive compensation, such as a percentage of the hourly rate charged to a customer, and “point” systems based on the items sold, but not tied to the price of those items. The Court observed that “none of the[se] cases interpreting § 204.1 has involved the compensation system which, like Carmax’s, compensate sales people with a uniform payment for each item or service sold and as a result, no cases construed the word ‘amount’ in the statute. This is an issue of first impression, and new facts require new law.” Id. at 1007. Rejecting plaintiff’s contention that in order to be “proportionate”, the percentage of the items sold payable to the commission employee must fluctuate, the Court observed that “paying sales people a uniform fee for each vehicle is proportionate—a one-to-one proportion. The compensation will rise and fall in direct proportion to the number of vehicles sold.” Id. at 1008. 

The Carmax decision represents a welcome victory for California employers seeking to apply this overtime exemption. Observes Jackson Lewis Partner JoAnna Brooks, who regularly handles wage and hour litigation in California, “The decision is surprising because it rejects the Division of Labor Standards Enforcement’s traditional guidance that a commission must be a percentage of the actual sales price. Other forms of fixed incentives are typically deemed bonuses or piece rates. Thus, it may be lawful to pay a fixed commission, but calculating a fixed payment based on anticipated “profit” after deducting expenses, such as overhead costs, may still be deemed a bonus. The consequences are significant, because it can result in mis-classification of an inside sales worker.”

Despite this decision, California wage and hour laws remain full of pitfalls for employers. Employers should proceed with caution. As Brooks notes, “Even employers who meet California’s commission exemption must take additional steps to ensure they have a properly drafted commission plan explaining when commissions are earned, the applicable rates paid, calculation of overtime and the impact of separation from employment.” 

California employers must continue to stay in the vanguard of wage and hour compliance to avoid costly litigation. 

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District Court Finds Commercial Window Washing Company To Be a "Retail or Service Establishment", But Questions Whether Compensation Received Is a "Commission"

Posted on July 6, 2010 by Noel Tripp

Litigation regarding what constitutes a “retail or service establishment,” under the “7(i)” or “retail sales” exemption continues. We recently reported a district court decision applying the exemption to employees selling precious metals. See La Parne v. Monex Deposit Co., 2010 U.S. Dist. LEXIS 59768 (C.D. Cal. Apr. 29, 2010).  Just a couple of months later, another district court analyzed the applicability of the exemption, this time to a company that provides window washing services primarily to commercial high rise buildings that are paid for by a management company, not the individual tenants. Alvarado v. Corporate Cleaning Service, Inc., 2010 U.S. Dist. Lexis 62378 (N.D. Ill. June 21, 2010).

The Court explained that to fall within the definition of a retail or service establishment, two requirements must be met: (1) the establishment cannot earn more than 75% of its revenue from goods or services that are provided for resale; and (2) it must be recognized as retail in the particular industry. Plaintiffs argued the window washing services were resold (and not retail) because the defendant did not contract directly with the commercial or residential tenants to provide the service, but instead, with management companies, who then recovered the cost of such work either through rent, property management fees, or assessments. Therefore, the services were bought by the management company and then resold to the tenants.  The Court rejected this assertion, and held the building management companies were “merely conduits,” or agents facilitating the purchase of window washing services, not middlemen reselling window washing services. 

The Court also found the services were “recognized as retail in the industry” because they were sold to the general public (even though most of their customers were commercial clients, not residential clients, rejecting plaintiffs’ argument that the exemption only applies to residential sales); the services met the “everyday needs of the community”; the services were provided at the end of the stream of distribution; and the defendant did not engage in manufacturing. The Court also held the mere fact the services were sold to corporate accounts with multiple buildings (as opposed to individual owners or those with a single building), did not transform the sale to a “wholesale” transaction. The Court also rejected plaintiffs’ argument that providing proposals to customers estimating the cost of the services were not “retail” transactions, finding such proposals are not akin to competitive bidding (which Department of Labor regulations state are not recognized as retail).

Nevertheless, despite holding plaintiffs were employed by a “retail or service establishment,” the Court denied summary judgment to the employer finding a question of fact existed whether plaintiffs satisfied another requirement necessary to establish the exemption—being paid more than 50% in commissions. Plaintiffs were paid using a point system, whereby they were compensated based on the number of jobs completed. Each job was assigned a number of points based on the number of windows washed. Thus, the quicker and more efficiently the plaintiffs worked, the more they earned per hour.  The Court held a commission exists when there is some relationship or correlation between compensation paid to the employees and the amount charged to the customers. The court found questions of fact remained regarding whether a true nexus existed between pay received and the amount charged to the customer based on evidence produced by the plaintiffs that on occasion, the labor cost charged to a customer did not fluctuate based on the number of points.   

Employers relying on the 7(i) exemption under federal law should review the relevant regulations and cases to ensure that the business qualifies as a “retail or service establishment” and that the compensation it provides is a “commission” as defined in the case law.

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