California Employers Who Pay Commission Based Wages Take Note

Court’s Ruling Provides More Leeway in Employers Categorizing Wages as Commission.

A recent decision by the California Second Appellate District allows employers to categorize a flat payment to salespersons for each product sold as commission wages, bringing those employees outside of the overtime pay requirement.

Traditionally, the amount a salesperson receives in commission for selling a product is proportional to the value of the product sold.  However, in Areso v. CarMax, CarMax implemented a commission plan were it paid its salespersons a uniform dollar figure for each vehicle sold.

For an example, if a CarMax salesperson sold a vehicle in California they would receive approximately $154 as part of the uniform payment plan, with no attention to the final selling price of the vehicle.  CarMax uses the uniform payment to avoid giving salespersons an incentive to push higher-price vehicles to promote their own commissions.

However, the plaintiff, Leena Areso, brought a claim challenging the payment plan.  She contended that her wages could not be classified as commission because they were not proportional to the value of the vehicle.  She argued that CarMax had improperly categorized salespersons as receiving commission wages and had also failed to pay overtime wages.

In California, an employee is exempt from the overtime pay requirement if their earnings exceed one and one-half of the minimum wage and if more than half of their compensation comes from commission.  For employees of vehicle dealers, California Labor Code section 204.1 sets out that wages qualify as commission if the wages are paid to the employee for services rendered in the sale of the employer’s property or services and based proportionately upon the amount or value of that property or services.

The court’s decision of whether a flat payment qualified as commission turned on how to interpret the word “amount” in the Labor Code.  The court determined that “amount” meant the number of products sold.   Therefore, compensating employees with a set payment for each vehicle sold qualified as commission because the payment was based proportionately on the number of vehicles sold.

How does this affect your business?

The court’s generous interpretation of commission wages is good news for employers because it means that they can pay a flat payment to a salesperson based on the number of vehicles sold and it will qualify as commission.  Such employees will not be subject to the overtime pay requirement.   Although Labor Code section 204.1 applies to employees of vehicle dealers, the Supreme Court of California stated in Ramirez v. Yosemite Water Company that the definition of commission may be more generally applicable and therefore would likely apply to other industries.

If your company works with commission based employees, please contact us for more information at