Appellate Court Issues Favorable Opinion On The Definition of “commission wages”

May 29, 2011

The California Second Appellate District recently issued an opinion that favorably expanded the definition of “commission wages” for employers who exempt their sales force from overtime requirements under the commissioned salesperson exemption.  In Areso v. CarMax, Inc., the Court held that CarMax’s commission plan that pays its salespeople a uniform payment for each used car sold (in addition to other components not at issue in the opinion) qualifies as “commission wages” for purposes of the commissioned salesperson exemption.

Plaintiff Areso filed a  class action lawsuit, alleging misclassification and failure to pay overtime wages because her employer’s commission plan did not qualify as “commission wages” under Labor Code Section 204.1, which requires commissions to be “based proportionately on the amount or value” of the sale of the employer’s property or services.  The trial court granted CarMax’s motion for summary adjudication, finding CarMax’s compensation arrangement is a “performance-based incentive system and thus fairly understood to be a commission structure” based on the statutory language that commissions may be based on the “amount” rather than “value” of vehicles sold, construing “amount” to mean the number of vehicles sold.  The Court of Appeal agreed and affirmed the summary adjudication order, agreeing with CarMax’s argument that prior decisions requiring commissions to be based on “a percentage of the price of the product or service” (as first articulated in Keyes Motors, Inc. v. DLSE, 197 Cal.App.3d 557, 563 (1987)) as it related only to the part of the statutory language in Labor Code § 204.1 interpreting the “value” of the product or service.

The Areso Court confirmed the two-part inquiry adopted in Keyes Motors.  To qualify for the commissioned salesperson exemption, the employee: (1) must be involved principally in selling a product or service (not making a product or rendering a service); and (2) the amount of their compensation must be based proportionately on the amount or value of the product or service.  However, the Areso Court distinguished this case from other cases where the employer’s commission plan was held not to constitute commission wages because those cases interpreted whether the commissions were based on the “value” of the product or service. For example, commissions that were based in part on winning sales contests (in Harris v. Investor’s Business Daily, Inc., 138 Cal.App.4th 28 (2006)) did not qualify as commission wages. The Court noted no other court has construed the word “amount” in the statute, and that CarMax’s payment of a flat dollar figure for each vehicle sold satisfies the statutory requirement because the commissions are paid based on the “amount” or number of vehicles sold.  Further, paying a uniform fee for each vehicle is “proportionate” because it is a one-to-one proportion where the “compensation will rise and fall in direct proportion to the number of vehicles sold.”

This case is a good development for employers who classify their sales employees as exempt commissioned salespeople and compensate them with commission plans that may have various components, including a “flat fee” component.  As this is a new interpretation and development, it remains to be seen whether other courts will follow the Areso Court’s lead.

Employers Are Not Required to Provide an Indefinite Leave

May 23, 2011

In Department of Fair Employment and Housing v. Lucent Technologies, Inc., the Ninth Circuit held this week that disability discrimination and failure to accommodate could not be proven against an employer who terminated an employee after a year of leave due to the employee’s disability. The employee at issue, Steven Carauddo, was an installer who became injured in the course of his job duties. The employee’s injuries indisputably rendered him incapable of performing the essential duties of his position. As a result, Lucent placed him on a leave of absence. Lucent had a policy whereby employees who were unable to return to work after 12 months due to disability were terminated from employment. However, the employee could apply for an extended leave with a doctors’ note indicating a prognosis for a full recovery within 6 months.

Lucent stayed in communication with Carauddo regularly throughout his leave of absence regarding his continued physical restrictions and inability to perform the essential functions of his job. One of the essential functions of his job was that he regularly lift up to 50 pounds. Carauddo remained unable to perform this function, according to his doctors, throughout the entire 12 month disability period. When Carauddo was unable to return to work after 12 months, Lucent terminated his employment pursuant to its policy. Over the next two months, Lucent continued to have communications with Carauddo’s doctors regarding his lifting restriction, and Carauddo’s doctor at that point cleared him to return to work with no restrictions. However, Lucent did not reinstate him.

The following year, the Department of Fair Employment and Housing sued Lucent on Carauddo’s behalf for disability discrimination, failure to accommodate, and failure to engage in the interactive process. Lucent removed the case to federal court and the court granted Lucent summary judgment, throwing out the DFEH’s claims. Notwithstanding its well-known pro-employee stance, the Ninth Circuit agreed with the lower court and affirmed the judgment in Lucent’s favor. In so doing, the Ninth Circuit held that Lucent clearly and regularly engaged in the interactive process with Carauddo to determine whether he could perform the essential functions of his job or an alternative job. Lucent also reasonably accommodated him by giving him a 12-month leave of absence. Carauddo was still unable to perform the essential functions of his job (or any other available job) at the end of that 12 month period. As a result, the court held that Lucent lawfully terminated his employment because it was not required to provide an indefinite leave of absence or modify the duties of Carauddo’s position in order to accommodate his disability.

Mandatory Sick Days Passes The Assembly Judiciary Committee

May 16, 2011

Paid mandatory sick leave legislation has been proposed and defeated in recent California legislation sessions. Unfortunately, this legislation has reared it’s ugly head once more and this time it has been passed by the Assembly Judiciary Committee. The proposed legislation, which would require California employers to provide paid sick days to employees (other than those covered by collective bargaining agreements) is now before the Assembly Appropriations Committee.

Under the proposed legislation, Assembly Bill 400, employers with 10 or less employees would have to offer full-time employees 5 days of paid sick time annually. Employers with more than 10 employees would have to offer full-time employees 9 paid sick days per year. Furthermore, the bill would provide that this sick leave is mandatory for any employee who works in California for 7 or more days in a calendar year (collective bargaining agreements excluded).

The specifics of the bill states that the purpose of the leave would be available for diagnosis, care, or treatment of health conditions of the employee or an employee’s family member, or for leave related to domestic violence or sexual assault. In addition, the bill also provides that there shall be a rebuttable presumption of unlawful retaliation if an employer denies an employee the right to use sick days, discharges, threatens to discharge, demotes, suspend, or in any manner discriminates against an employee within 90 days of filing a complaint under the statute or participates in any investigation related to denial of sick leave.

We are following this legislation very closely and will keep you updated as things develop.

EDD Will Deny Unemployment Benefits to Claimants Not Authorized to Work in the U.S.

May 8, 2011


The Employment Development Department (EDD) has come a long way! As you are aware, Potts & Associates processes unemployment claims on your behalf. We have been fighting very hard to get the EDD and the California Unemployment Insurance Appeals Board to be less liberal in their decision making role and to be more friendly toward employers. The EDD has at least taken a step in that direction probably because of all of the political pressures associated with immigration.

Now, as a result, when the EDD receives a new application for unemployment, they are first verifying the social security number to determine if it is valid and assigned to that person.  If there is any discrepancy, they are sending a letter to the Employer requesting clarification. If you receive one of these letters, forward it to Potts & Associates with the requested information and we will respond to it on your behalf.

The logic behind this new policy is really quite simple. As part of the eligibility for unemployment, the EDD requires that the claimant be “ready and willing to immediately accept new employment.”  Therefore, if the applicant does not have the legal right to work in the U.S., then they are not eligible for unemployment benefits. Suppose also that the Employer has decided to merely reduce the hours of an existing employee, and the employee then files an unemployment claim for partial benefits with the EDD. 

If the EDD then sends a social security mis-match letter to the Employer, it will be deemed by Immigration & Customs Enforcement (ICE) as constructive notice to the Employer that the individual may not be work authorized.  This would require the Employer to take further investigative action.  The Office of Special Counsel for Immigration-Related Unfair Practices under the U.S. Department of Justice, Civil Rights Divsion, has issued the “Do’s and Don’ts” for dealing with “No-Match” letters. This information can be found at their website:

Their telephone number is 1-800-255-8155. If you have any additional questions regarding claims for unemployment benefits as related to the denial of benefits, please give us a call.

U. S. Supreme Court-A Favorable Decision For California Employers

May 2, 2011

Yesterday, the U. S. Supreme Court handed down a decision (AT&T Mobility v. Concepcion) reversing the Ninth Circuit and holding that the Federal Arbitration Act (FAA) preempts California law insofar as the law operates to interfere with the purpose of the FAA, which is to promote arbitration as a streamlined procedure for resolving disputes.   The Court held that the operation of California law to void the class action waiver in AT&T’s contract nullified the parties’ agreement to arbitrate and which is inconsistent with the FAA.  The Court held that the FAA requires arbitration agreements to be enforced according to their terms and on the same footing as any other type of contract.  The Court explained that defenses to enforceability (fraud, duress, unconscionability) still exist but may not be applied in a manner so as to discriminate against the type of contract at hand.  The Court suggested that California courts have applied the doctrine of “unconscionability” to disfavor arbitration agreements and avoid their enforcement, contrary to the FAA.

The Court further explained that the FAA permits parties to agree to limit the types of issues to be arbitrated, including limiting class or collective claims, to further the arbitral goal of providing an efficient, streamlined procedure for resolution of disputes.  The Court further stated that any rule, like California’s, requiring the availability of class wide arbitration interferes with fundamental attributes of arbitration and therefore creates a scheme inconsistent with the FAA.

So what does this mean for California employers?  The AT&T case is not an employment case and did not involve the enforceability of a class action waiver in an employment arbitration agreement.  That said, the Court’s reasoning should apply equally to the enforceability of class action waivers in employment arbitration agreements.  This will no doubt be more definitively determined in other cases in the near future.  In the meantime, employers continuing to battle the cottage industry of wage and hour class actions in California should certainly revisit their arbitration agreements and ensure that a class action waiver is included.  These provisions stand much greater likelihood of enforceability in the wake of the AT&T decision.  Employers are cautioned, however, that the AT&T case does NOT hold that all California unconscionability standards relating to arbitration agreements are preempted by the FAA.  It is likely that the scope of preemption will be the subject of much litigation to come, with the focus being whether the standards are applied or operate in a manner that frustrates the purpose of the FAA.  For now, employers should continue to ensure that their arbitration agreements meet general standards of fairness for employment disputes, generally prescribed by the California Supreme Court in Armendariz v. Foundation Health Psychcare Services.