Definition is Particularly Important for California Employers, All Commission Wage Agreements Must Be in Writing by 2013

Effective January 1, 2013, California Labor Code 2751 directs that any employment contract that includes commission compensation must be in writing, setting forth “the method by which the commissions shall be computed and paid.” See, Employee Commissions, California Requires Written Agreements by End of 2012.

Yet, paying an employee a percentage of the income he or she generates by his/her production does not necessarily mean the arrangement will fit California’s particular definition for a commission (and thus the upcoming “must be in writing” requirement):

“Commission wages are compensation paid to any person for services rendered in the sale of [an] employer’s property or services and based proportionately upon the amount or value thereof.” Labor Code 204.1 (emphasis supplied).

A compensation method must meet two requirements before it is considered to constitute such “commission wages” in California:

1. The employees must be involved principally in selling a product or service, not making the product or rendering the service; and

2. The amount of employee compensation must be a percent of the price of the product or service.

California appeals court application of the “sales only” portion of this definition has thus found that paying auto mechanics a percentage of the hourly rate charged to customers for repairs did not constitute a commission wage. Mechanics don’t sell cars, they only fix them. Keyes Motors, Inc. v. Division of Labor Standards Enforcement (1987) 197 California Appellate Reports, third series (Cal.App.3d) 557, 564

On the second, “percent of the price” portion of the definition, another California appeals court found a payment plan based on a point system related to the number of subscriptions employees sold did not constitute “commission wages.” The court found there was no showing that the points were tied to any particular price of the subscriptions sold and were instead determined by winning sales contests, selling certain types of subscriptions and other factors. Harris v. Investor’s Business Daily, Inc. (2006) 138 Cal.App.4^th 28, 41

Another more recent decision further clarifies (and expands) the boundaries of the “commission wages” definition. In Muldrow et al. v. Surrex Solutions Corporation (August 29, 2012) 202 Cal.App.4th 1232, the subject employees recruited “candidates” for employer “clients.” Surrex’s clients would place “job orders” with Surrex and appellants would search for potential candidates to fill the job orders. The employees would use various resources to find candidates, including an internal database that Surrex maintained and various “on-line job boards.” Appellants would then attempt to convince both the candidate and the client that the placement of the candidate with the client was a proper fit.

While the Surrex employees’ written contracts specified “sales” was only one of several responsibilities (also including account development and management), the court found the job amounted to sales and sales-related activity. Moreover, Surrex obtained revenue from a client only in the event of a successful placement from which the employee instrumental in the transaction received a percentage commission equal to: a) the percentage of the placement fee (for candidates hired directly by employer clients); or b) the percentage of the profits Surrex received (for candidates Surrex placed as independent consultants and billed to the client at an hourly rate).

The employees, who had a stake in excluding the Surrex “percentage of profits” plan from the above definition (it would have meant they could collect overtime pay) argued that only a payments calculated from a straight percentage of the price of the service of product sold should constitute “commission wages.” The appeals court disagreed, finding that Surrex’s profit-tied commissions were sufficiently related to the price of the services sold to fall within that definition.

Any percentage compensation agreement that falls outside of the definition (such as those for mechanics and publications sales above) will be excluded from Labor Code 2751’s upcoming “must be in writing” requirement. With this new law approaching, there is no better time for California employers paying employees on a percentage basis to review their compensation structures to confirm whether such arrangements must be in writing and, regardless, whether the computation methods are clearly articulated and consistently applied. Contact an experienced employment law attorney for assistance.

August 29, 2012

California Businesses Must Reimburse for Employment-Related Use of Personal Vehicles, Phones and More

A California employer must reimburse the expenses its workers “necessarily” incur as part of their jobs (Labor Code Section 2802). On the other hand, a business generally has no such obligation for an employee’s costs that enables him or her to appear for work.

For example, a company is required to pay a worker for his/her use of a personal car for work-related purposes (travel to and from a business meeting) but not for commuting to or from the job. An employer would have to reimburse an employee for covering the expense of food and drink served at a scheduled, required staff meeting. However, a business does not have to pay a worker for his/her grocery bill even though eating meals would likely enable that person to perform more efficiently on the job.

Of course, an employee’s cost of operating his or her car for job-related actions is not limited to the fuel required. Insurance and maintenance are also included. Yet, an attempt to fairly apportion each such item of operational expense could become an administrative nightmare. California practice simplifies the process, recognizing that employers meet their obligations to reimburse business-related related use of a worker’s vehicle by paying the acceptable rate for the mileage thus traveled. The published current federal IRS mileage rate is the commonly accepted measure.

As long as a company provides such mileage reimbursement, that company will normally not be considered responsible for an employee’s damage to or loss of his/her vehicle during that such business-related operations. The worker is expected to carry the requisite insurance and to cover repair or replacement costs with the aid of such mileage reimbursement.

California Labor Code 2802 is not limited to reimbursement for vehicle use. Employers must cover an employee’s “necessary” payment for business-related telephone and computer usage, internet connections, tools, office supplies, etc. An employer may also be obligated to pay a fair allocation of an employee cost to maintain his/her living space if a portion of that home or apartment is dedicated exclusively to perform employment duties.

This means that a policy that absolves a company from reimbursing an employee who failed to obtain advance approval for his/her payment of a necessary job-related expense is unenforceable and unlawful. A company can issue a policy requiring such pre-approval where advance requests are foreseeable, but the consequence for violation should be possible disciplinary action rather than non-payment of the monies spent.

Employers who fail to reimburse for legitimate job-related expenses are subject to legal action, including payment of the worker’s attorney fees and costs incurred in collecting such monies. California Labor Code 2802(c).

What is “necessary” does not usually include what can fairly be considered extravagant. Thus, employers can and should issue sensible policy and guidelines setting expense level standards, for example an acceptable range and maximum for repayment on hotel rooms, rental cars, etc. A worker that chooses to exceed such reasonable limits would then be on notice that he/she will have to personally cover that excess.

It is also within a business’s prerogatives to require adequate documentation of claimed work-related expenses and to decline payment for unsupported reimbursement requests. Obviously, such rules should be specified in written policy to limit the potential for later disagreements and successful legal claims.

An experienced employment law attorney can help draft the written guidelines that will properly balance a company’s required reimbursement when fairly due with the needed deterrence for irresponsible and excessive employee spending in the course of job performance.

August 3, 2012

Case Study Illustrates Drafting “Do’s” and “Don’ts”

California law very strongly supports two potentially conflicting policies on the handling of employment disputes. On the one hand, employees and employers alike have rights to have their civil claims heard by a jury in a formal court proceeding. On the other, this state recognizes the rights of employers and workers to contract for the private arbitration of any employment-related dispute despite either side’s rights to a jury trial. The common wisdom is that employers generally prefer arbitrations over jury trials as arbitrations are faster, private and don’t involve the sometimes volatile, less objective opinions of multiple jury members.

For more than ten years, California court decisions have sought to draw the line between these two competing interests by analysis of the unfairness of the contract terms for arbitration. Circumstances which indicate: i) an employer’s imposed oppression or surprise in the bargaining and negotiation of the contract; and ii) overly harsh and one-sided results favoring employer are considered “unconscionable,” thus rendering the arbitration agreement unenforceable. See, “Arbitration Nation”

A recent California Court of Appeal case illustrates how an employer should not go about establishing mandatory arbitration for all workplace disputes. Sparks v. Vista Del Mar Child & Family Services (July 30, 2012). The court declined to enforce the defendant business’s claimed arbitration agreement for several reasons, including:

• The employer had buried the arbitration provision in a lengthy employee handbook (thus indicating the provision was probably not subject to negotiation between the parties)
• The provision was not prominently distinguished from the other passages in the handbook nor was there any place for employees to acknowledge that provision in writing at that point in the pages
• There was no reference to the arbitration clause in the overall acknowledgement statement for receipt of the handbook
• The handbook clearly stated it was not intended to be a contract but was instead a general summary of workplace policies, provided for “information” purposes
• The arbitration provision was illusory since the employer could unilaterally modify the handbook, including the arbitration provision, at any time; and
• The arbitration policy referred to the American Arbitration Association’s (AAA) procedural rules but the employer never provided them to the employee.

Among its many lessons, the Sparks case confirms that arbitration agreements should ideally be set out separately from a company’s handbook. If that is not possible, arbitration provisions in a workplace policy manual as well as the employee’s accompanying acknowledgment statement for that provision should be prominently displayed in that policy volume. A “management side” employment attorney should be able to assist in developing sound workplace arbitration agreements.

Nice Idea, But Don’t Promise

The wisdom of implementing a progressive discipline policy – imposing ever greater consequences upon an employee’s repeated misconduct – would seem a personnel management no-brainer. After all, it’s only fair to give an errant but largely productive employee a second or third chance. It would also be poor judgment for management to impose termination, the workplace equivalent of the death penalty, for a first-time minor infraction.

However, implementing a guaranteed and mandatory progressive discipline procedure would create two significant difficulties.

First, such dictated policy contradicts “at will” employment status. “At will” means that either employer or employee may terminate their relationship at any time, for any lawful reason or for no reason at all, with or without advance notice. However, promising workers unconditionally a progressive series of steps of escalating discipline before management could terminate can destroy any “at will” status. Now, an employer would actually have to have a verifiable, just cause to lay off a worker.

Second, a required progressive discipline policy could protect a gross first-time offender from a deserved termination while threatening the safety and security of the remaining workforce. For example, a “no exceptions” progressive discipline policy might protect a worker who commits a violent act causing serious injury from immediate and deserved termination, exposing the rest of the staff to repeat offenses from that individual.

To prevent these harmful consequences, management should specify that:

• its progressive discipline policy is a guideline only and that the company reserves the discretion to adjust the discipline to the offense, including instant termination for a grave first time violation; and
• nothing in the policy is intended or should be interpreted as modifying the company’s previously established “at will” employment relations with any of its staff.

An experienced employment attorney can of course assist on ensuring employee discipline policy and practice are fair to all concerned.

See also, Oh No You Didn’t! Wrongful Termination of At-Will Employees.

July 13, 2012

By the end of 2012, Labor Code 2751 will require California businesses to place all of its commission compensation arrangements with their employers in writing or such agreements may be unenforceable. See, Employee Commissions, California Requires Written Agreements by End of 2012. As the year edges to a close, employers should thus confirm their commission plans are documented in clearly expressed policy memos or written agreements.

The recent California Court of Appeal decision in Deleon v. Verizon Wireless (July 10, 2012) illustrates the importance of drafting unambiguous commission plans, particularly where the business is prone to class action claims as a large employer such as Verizon.

Verizon’s written plan established that after a guaranteed minimum base pay, sales representatives received advance payments of their anticipated commissions which were not actually earned (“vested”) until the expiration of a chargeback period during which the consumer had the right to cancel the service. The plan thus allowed the employer to make later deductions from the advanced amounts to calculate the final “earned” amount for a given time period.

The plaintiff, Deleon, worked as a Verizon sales representative for some nine months, subject to the company’s written advance payment and chargeback plans in effect during that time. Claiming he was qualified to represent numerous other sales representatives under a class action, Deleon challenged the plans as an alleged “secret underpayment of wages” under Labor Code section 223.

Deleon contended the initial payment of commission monies should not qualify as unearned “advances” and instead should be regarded as earned wages. Thus, he asserted that later deductions from these initial payments were improper “secret deductions” from wages.

Verizon prevailed in the case. The court commended the employer’s clarity in its written plans: “As specifically described in the compensation plans, Deleon received advances and his commissions were earned at the expiration of the chargeback period. Section 223 refers to the underpayment of wages. Commission advances are not wages.” Emphasis added.

The Deleon v. Verizon Wireless decision thus underscores the importance for carefully drafted commission agreements. If Verizon had failed to make clear that initial payments were unearned amounts pending its well-defined consumer chargeback periods, the case may well have had an entirely different outcome with significantly negative impact on that employer.

For assistance creating complete and comprehensive sales commission agreements, contact a knowledgeable labor law attorney.

July 10, 2012

In California, an employee terminated for “misconduct” is disqualified from receiving unemployment benefits. In Paratransit Inc. v. Unemployment Insurance Appeals Board (Medeiros) (May 31, 2012), the Court of Appeal found an employee’s declining to sign a “receipt” line at the bottom of a disciplinary notice constituted such misconduct. Thus terminated over the refusal, that employee, Mr. Medeiros, was not eligible for unemployment.

The consequence is ironic as the discipline that Paratransit driver Mr. Medeiros was to receive was only two days suspension without pay (for a reported incident with a passenger). For declining to sign the memo describing that discipline, he lost his job and his “out-of-work benefits” to boot.

California Labor Code section 2856 specifies that an “employee shall substantially comply with all the directions of his [her] employer concerning the service on which he [she] is engaged, except where such obedience is impossible or unlawful, or would impose new or unreasonable burdens upon the employee.” The Court of Appeal found that Mr. Medeiros violated his section 2856 obligations by failing to sign the memo. However, this insubordination did not by itself disqualify him from collecting unemployment.

California Labor Code section 1256 bars unemployment benefits for an employee terminated for misconduct. The California Supreme Court has found such misconduct to include action showing wilful or wanton disregard of an employer’s interests “as is found in deliberate violations or disregard of standards of behavior which the employer has the right to expect of his employee … On the other hand mere inefficiency, unsatisfactory conduct, failure in good performance as the result of inability or incapacity, inadvertencies or ordinary negligence in isolated instances, or good faith errors in judgment or discretion are not to be deemed ‘misconduct’ within the meaning of the statute.” Amador v. Unemployment Ins. Appeals Bd. (1984) 35 California Reports, third series (Cal.3d) 671, 678

Mr. Medeiros asserted he qualified for unemployment as his refusal to sign was supposedly a “good faith error in judgment” since he thought signing the “receipt” line was his admission of guilt on the alleged offense. Although the employer’s representatives sought to assure him this was not the case, Mr. Medeiros claimed he believed those representatives were lying. However, the Court of Appeals ruled against him. In this context, where the employer was only presenting a memo with the results of a prior investigation, including the ensuing decision on discipline, refusing to sign a simple acknowledgment of receipt of that memo was sufficient deliberate disregard of the company’s directives to constitute “misconduct.”

While this Paratransit decision involved other issues (including whether the company had to use more specific language in the memo on “non-admission of fault” due to Mr. Medeiros’s union agreement – it did not), its fundamental lessons are:

• An employer can and must conduct any investigation over substantial employee rule violations deliberately and fairly, providing the subject worker ample opportunity to respond to any charges before the company makes its findings and any disciplinary decision
• Once the company completes such deliberate process, the findings and decision should be presented to the subject employee in writing; and
• As long as any acknowledgment the employee is to sign concerning that “findings and decision memo” only establishes that he or she has received that memo (and does not require that worker to agree with the findings), then that employee may be disqualified for unemployment if the company terminates him/her for refusing to sign that acknowledgement.

Obviously, handling terminations for violations of workplace standards and rules can be a touchy subject. For assistance, contact an experience employment law attorney.

May 31, 2012

An employer is not only liable for actually terminating a worker on the basis of race, gender, national origin and other protected classifications. A worker may also have a claim if the employer “unlawfully constructively discharged” that person (also known as “unlawful (or wrongful or illegal) constructive termination” or “unlawful constructive dismissal”). See, “Constructive Discharge, When Employers May Be Liable for ‘Causing’ a Resignation.”

An employee claiming unlawful/wrongful constructive discharge must show the employer made the environment so unbearable on the basis of that person’s race, national origin, or other such protected classification that the worker had no reasonable choice but to resign. In effect, the employer fired that worker just for creating such extremely hostile conditions and can be liable for discrimination even though the business took no formal action to terminate the person. See, Turner v. Anheuser–Busch (1994).

Under appropriate circumstances, the courts may also treat a retirement as a wrongful constructive discharge. In one California case, an university made the employee’s working conditions “so intolerable that her preexisting medical condition worsened to the point where she was no longer able to function in her duties and needed to remove herself from her job.” The court thus found such conditions caused her disability-based retirement, thus amounting to an illegal constructive discharge. See, Colores v. Board of Trustees of Calif. State Univ. (2003).

An employee does not automatically have a claim for unlawful constructive discharge just because he or she was belittled or harshly criticized. Again, the extreme hostility that triggers a legal claim must be based on a person’s protected characteristics or classification that is protected by the anti-discrimination law. A worker would not have a constructive discharge claim arising out of management’s rough verbal reactions to that employee’s production errors. That might cause a constructive discharge, but not an illegal one. However, that worker would have a possible unlawful constructive discharge claim for extreme abuse over his or her gender, religion, physical or mental disability or the like.

Executives and managers are of course expected to create and maintain a working environment that promotes understanding, collaboration and efficient, quality production. Supervisors are best advised against any prolonged angry or antagonistic treatment of any worker for any reason, with zero tolerance of any hostility expressed due to a person’s membership in a classification protected by law. An experienced employment lawyer is equipped to help management navigate this area, preferably well before any trouble or legal claim arises.

May 25, 2012

An employer is not only liable for actually terminating a worker on the basis of race, gender, national origin and other protected classifications. A worker may also have a claim if the employer “unlawfully constructively discharged” that person (also known as “unlawful (or wrongful or illegal) constructive termination” or “unlawful constructive dismissal”). See, “Constructive Discharge, When Employers May Be Liable for ‘Causing’ a Resignation.”

An employee claiming unlawful/wrongful constructive discharge must show the employer made the environment so unbearable on the basis of that person’s race, national origin, or other such protected classification that the worker had no reasonable choice but to resign. In effect, the employer fired that worker just for creating such extremely hostile conditions and can be liable for discrimination even though the business took no formal action to terminate the person. See, Turner v. Anheuser–Busch (1994).

Under appropriate circumstances, the courts may also treat a retirement as a wrongful constructive discharge. In one California case, an university made the employee’s working conditions “so intolerable that her preexisting medical condition worsened to the point where she was no longer able to function in her duties and needed to remove herself from her job.” The court thus found such conditions caused her disability-based retirement, thus amounting to an illegal constructive discharge. See, Colores v. Board of Trustees of Calif. State Univ. (2003).

An employee does not automatically have a claim for unlawful constructive discharge just because he or she was belittled or harshly criticized. Again, the extreme hostility that triggers a legal claim must be based on a person’s protected characteristics or classification that is protected by the anti-discrimination law. A worker would not have a constructive discharge claim arising out of management’s rough verbal reactions to that employee’s production errors. That might cause a constructive discharge, but not an illegal one. However, that worker would have a possible unlawful constructive discharge claim for extreme abuse over his or her gender, religion, physical or mental disability or the like.

Executives and managers are of course expected to create and maintain a working environment that promotes understanding, collaboration and efficient, quality production. Supervisors are best advised against any prolonged angry or antagonistic treatment of any worker for any reason, with zero tolerance of any hostility expressed due to a person’s membership in a classification protected by law. An experienced employment lawyer is equipped to help management navigate this area, preferably well before any trouble or legal claim arises.

May 25, 2012

The California Supreme Court has promptly followed its game-changing Brinker decision with another important ruling, specifically limiting the rights of workers to collect attorney fees from their employers in lawsuits over allegedly missed meal breaks and rest periods.

As we reported in “Brinker: California’s Meal Break Breakthrough, Employers are No Longer the Lunch Police,” California had experienced an explosion of lawsuits over workplace meal and rest periods ever since the 2000 enactment of Labor Code 226.7. That statute requires employers to pay an employee an extra hour of compensation for “each work day that the [required] meal or rest period is not provided.” The recent Brinker decision clarified several aspects of that law that are favorable to employers. See also, “Brinker Decision and Rest Periods, California Employers Get a Break.”

Yet, Brinker did not address a worker’s ability to collect attorney fees from his/her employer in the event of a successful suit over this meal and rest period law. Over the past decade, the prospect of collecting such fees from employers has become an additional incentive to bring such claims.

However, in Kirby v. Immoos Fire Protection, Inc. (April 30, 2012), the California Supreme Court found that neither the employee nor the employer can recover attorney’s fees on such claims over meal and rest period violations. This clarification is another favorable development for employers who are generally required to pay the “prevailing party” attorneys fees if they lose a wage/compensation-related lawsuit, but rarely, are allowed to recoup fees if they win the case.

The Kirby decision will likely further discourage lawsuits over alleged meal and rest period violations, particularly the higher stakes class action suits.