Yesterday the California Supreme Court issued its decision in Gattuso v. Harte-Hanks Shoppers, Inc., ruling that employers may reimburse employee expenses in the form of "additional wages" payable in a "lump sum" instead of reimbursing each separate expense for the exact amount incurred.

This case deals with a scenario common to sales employees where the employer simply gives the employee a set automobile "allowance" or a "per diem" payment that is meant to cover the employee's mileage expenses, etc. instead of having the employee submit expense reimbursement requests.

The Plaintiff in Gattuso argued that this was not an allowable method of expense reimbursement and that the payments must be made separately from wages.

Expenses Still Must Be Reimbursed Fully

Under Labor Code section 2802, employers must reimburse all expenses the employee pays for out-of-pocket in carrying out their duties. This includes mileage driven in their own automobile and gas put into a company car. Labor Code section 2804 further states that an employer and employee cannot agree to waive this reimbursement requirement.

The Court held that the employer still must make clear what portion of the salary or commission payments is meant to reimburse the employee for expenses versus compensation for the work performed.

This is because if the amount meant to cover expenses is not enough to cover the actual amount of expenses incurred during a pay period, the employer must pay the employee additional money to make up the difference.

The "Lump Sum" Method is Not for the Lazy Employer

I think that many employers use the "lump sum" method out of laziness, because they (understandably) do not want to process expense reports and write separate checks in varying amounts each month. The employer in Gattuso actually took this a step further and simply increased the employees' commissions by a certain amount to cover expenses.

"Lazy" employers probably should not use this method, however, because regardless of what they pay the employee to cover expenses each month, the employer still has a duty under section 2802 to fully reimburse employees for expenses.

So, the employer has to make sure they pay the employee any additional money owed above and beyond the "lump sum" payment, but they presumably are no longer requiring employees to submit expense reports, so they are unable to determine if they have paid enough.

These employers will have the logistical nightmare of trying to "guess" whether they are complying with the law. The only way to be sure is to have employees submit expense reports each month, compare the totals to the "lump sum" payments and pay out additional monies for any extra reimbursements owed.

By this point, the whole point of using the "lump sum" method has been defeated. For an employer who uses the "lump sum" method and is meticulous in complying with the law, the only difference is that most months employees get a windfall in the form of extra wages if they incur expenses totaling less than their "lump sum".

Gattuso Does Not Change Much

Gattuso does not really change anything under California law, except in clarifying that this "lump sum" payment method is indeed legal.

All California employers (and out-of-state employers with California employees) must still fully reimburse all employees for any and all expenses incurred on the employer's behalf.

Some Income Tax Implications are Unknown

If your employer does use this method to reimburse you for expenses incurred, it might be a good idea to point this out to your accountant or tax attorney because the difference between "wages" and "expense reimbursement" affects California withholding rights and obligations, as well as income tax liability.

Q: My employer pays me at one rate of pay for my regular work, but then pays me minimum wage for travel and attending seminars after-hours. How is my overtime supposed to be calculated?

--Bad at Math (CA)

A: Calculating overtime for an hourly employee who is paid at two separate hourly rates is a fairly complicated analysis and does not come up very often, but hopefully the explanation below makes some sense to you. If you need more help understanding the calculation, please feel free to contact me.

Introduction to the "Regular Rate" (versus the "Base Rate")

An employee's "regular rate" of pay is a legal term for the number used to calculate their "overtime rate" of pay, which is either 1.5 or 2 times the "regular rate," depending on how many hours are worked.

What I call the "base rate" of compensation is the typical rate at which you are paid in a regular day, week or hour of work, whether at an hourly rate, salary, commissions, etc.

Some people get confused by the term "regular rate" and mistake it as a synonym for what I call the "base rate". However, the "regular rate" is only used to calculate the "overtime rate". It really has no other purpose and often bears little resemblance to an employee's actual "regular wages".

In fact, the "regular rate" can often differ greatly from the "base rate," as explained below.

Calculation of "Regular Rate" for Hourly Employees

For hourly employees, the "regular rate" is determined by taking all of the money an employee is paid in any given week and dividing it by the total number of hours worked that week.

The Usual Situation

Hourly employees are usually paid just a straight hourly rate for their "base rate". So, for most hourly employees their "regular rate" is the same as their "base rate".

• Employee is Paid $15 per hour ("base rate")
• ($15/hr X 45 hours=$675)/45=$15 ("regular rate")

For purposes of this example, we will assume that he employee worked 40 regular hours and 5 overtime hours. To calculate overtime pay, the "regular rate" is multiplied by 1.5 to determine the "overtime rate", which in this example would be $22.50.

The most common way to calculate overtime in this situation is to multiply the "base rate" by 40 hours to get the employee's "regular pay" ($600), multiply the "overtime rate" by 5 to get their "overtime pay" ($112.50), and add the two figures together ($712.50) to calculate the wages owed.

However, this is not technically correct, because what the law says is that the employee is entitled to additional "premium pay" for overtime hours worked. So really the way this should be calculated is to multiply the number of hours worked by the "base rate" ($675) and then multiply the 5 overtime hours by the difference between the "overtime rate" and the "regular rate" ($7.50) to determine the additional "premium pay" owed and add the two figures together ($712.50) to calculate the wages owed.

The reason you must subtract the "base rate" from the "overtime rate" is because the employee has already been compensated partially for the overtime hours worked at the "base rate".

While both methods seem to work in this example, the reason the longer version is correct becomes apparent from the next example.

The Complicated Situation

When an employee is paid at two different hourly rates for different tasks, the employer must calculate the "regular rate" using a "weighted average" of the different hourly rates.

Using the same example above, assume that the employee is paid $10 per hour for time spent doing janitorial duties at a retail sales job and that the first 40 hours of the week were spent doing sales work at $15 per hour and the last 5 were spent doing janitorial work.

First, calculate the "regular rate," which is done the same as above--by adding all of the money earned by that employee for the week and dividing it by the number of hours worked:

• [($10/hr X 5 hours=$50)+($15/hr X 40 hours=$600)]/45=$14.44

Second, calculate the "overtime rate" by multiplying the "regular rate" by 1.5 ($21.67). Finally, calculate the "overtime pay" by taking the difference between the "overtime rate" ($21.67) and the "base rate" for the overtime hours ($10.00) and multiply that number ($11.67) by the number of overtime hours worked (5) to determine the additional "premium pay" owed ($58.35).

The total pay for this week should be $708.35.

Again, I know this analysis is complicated, but if you have any questions about whether you are being paid overtime correctly, you should contact an employment law attorney.

Although this series on commissioned salespeople and overtime might not be the most exciting employment law topic, for those with large unpaid claims, it probably is the most exciting. I leave this topic with the following points.

Minimum Wage Test

The final test that must be met before commissioned salespeople can be considered "exempt" from overtime wages is the "minimum wage" test.

Each week a commissioned salesperson must make at least 1.5 times the California minimum wage. Otherwise, they are automatically considered non-exempt for that week.

For employees with low "base" pay or those who are paid 100% commission, this puts the unwelcome burden on employers of paying overtime to those salespeople who are not very good at their job and do not make any commissions for the week.

However, many employers simply pay a "base" rate of 1.5 times the minimum wage to stop this from happening in the first place.

Must Actually "Sell"

Some employees have "sales support" positions. They are the ones who actually install the product or provide technical support for the salespeople but do not actually "sell" to the customer.

This probably should just go without saying, but in order to be classified as "exempt" for being a commissioned salesperson, you actually have to be "selling" something.

Common Misclassifications in California

Some of the professions that are most often misclassified include the following groups:

• Financial Planners
• Stock Brokers
• Mortgage Brokers
• Other Financial Industry Salespeople
• Those who provide "sales support" but do not actually sell, and
• Commercial Equipment Salespeople

If you belong to one of these professions, you very well may have a large unpaid wages claim to pursue!

Even if you meet the criteria to be classified as "exempt" from overtime pay as a commissioned salesperson, the business your employer is engaged in can also automatically qualify you for overtime, regardless of how you are paid.

Commissioned salespeople can only be "exempt" if their employer is a "retail or service establishment". Whether your employer qualifies is very complicated and there might not even be a straight answer.

Basically it comes down to the question of whether what your employer sells is often sold at "retail". This is opposed to "wholesale," although that does not shed much light on things, either.

The basic test (to which there are many exceptions) is whether the type of product your employer is selling is something sold to the general public, as opposed to other businesses.

One of the best examples from my own experience is a client who sold those self-checkout kiosks you see in grocery stores, Home Depot, etc. This was all his company sold, so this was pretty much a "slam dunk" that his employer was not a "retail or service establishment" and he had overtime claims exceeding $100,000 per year.

An example from the other extreme would be electronics salespeople in stores like Best Buy or Circuit City. These salespeople really only sell to the general public, so their employer clearly is a "retail or service establishment".

In order for an employee to qualify as "exempt" from overtime pay as a commissioned salesperson, the main test that must be met is the employee MUST make more than 50% of their wages in the form of "commissions". This test is not as straightforward as it might sound at first.

What are "commissions"?

Many employees receive what their employers call "commissions" as part of their wages each pay period, but few give thought to what this term actually means.

Under California law the term has a specific definition. It means wages an employee receives that are calculated as a percentage of the purchase price of the good or service sold.

So, for example, if you receive a set amount of money for each item you sell, no matter how much you sell it for, these wages are NOT commissions under California law. These types of wages are considered along the lines of a "bonus" in California, not "commissions".

So, any wages an employer calls "commissions" that do not meet this test cannot be counted towards the 50% commissions threshold.

If a salesperson is paid a base amount plus these types of "commissions," that employee is almost certainly entitled to overtime pay.

How is the 50% measured?

It is not totally clear under California law what time period is used to measure whether an employee makes more than 50% in commission pay.

Arguably the measurement is week-to-week, so an employee may be considered "exempt" one week and "non-exempt" the next.

The representative period likely depends on the sales-cycle of a particular industry, but if your commissions dramatically go up and down from one pay period to the next, there is at least a strong argument that you are owed at least some unpaid overtime.

Hopefully you are starting to see how complicated this exemption can get and how it can be very difficult for employers to squeeze their salespeople into its parameters.

This is the first in a series of posts dealing specifically with the issue of commissioned salespeople and unpaid overtime. This is an area most employees, many employers, and even a large percentage of California attorneys do not understand correctly.

Top salespeople often make a very comfortable living and never even think about whether they are legally entitled to overtime pay.

Usually only salespeople who are wrongfully terminated or seek legal advice for other reasons ever recover these amounts because a lawyer tells them about their claims.

If you are a salesperson, these posts are required reading, because you might be getting cheated out of some very substantial amounts of wages, regardless of how much money you are making in regular wages.

"Commissioned" DOES NOT Equal "Exempt"

Many salespeople assume because they are "commissioned" they are not entitled to overtime. However, whether or not a salesperson is truly "commissioned" is determined by a complicated legal analysis.

Further, even if a salesperson is "commissioned," this is only one of many requirements that must be met before an employer can treat an employee as truly "exempt" from overtime pay.

Hopefully this series will help some of these employees realize their current (or former) employers owe them some substantial wages that might be worth pursuing.

"I make a good living--why should I care about getting overtime, too?"

For those who have not been following this blog, it would be helpful for you to review my earlier posts on common mistakes employers make in calculating the rate of overtime pay and the number of overtime hours worked to see just how much money might be owed.

It is not unheard of for salespeople to be owed hundreds of thousands of dollars if they work enough overtime, make enough money in regular wages and have worked for their employer long enough.

These employees are getting cheated out of their wages either because their employers are ignorant of the law or the employers are happily pocketing these extra wages because the employees do not know their rights. Either way, the employees are legally entitled to these earned, but unpaid wages.

The next few posts will deal with determining whether or not a salesperson is entitled to unpaid overtime wages. In my experience, many of them are.

Employers, either through ignorance or intentionally, often make big mistakes in calculating overtime rates of pay for their employees and these often turn into big claims by the employees for unpaid wages later on.

Overtime Rate NOT Just 1.5 Times Hourly Rate

To calculate an employee's "overtime rate" of pay, you first have to calculate their "regular rate" of pay, which is the number multiplied by 1.5 to get an "overtime rate".

Most employers do not include commissions, bonuses and other additional money an employer earns in calculating the employee's "regular rate" for overtime purposes.  Employers usually just take the employee's hourly rate, multiply it by 1.5 and use that as the overtime rate.

However, under California law the "regular rate" is generally calculated by taking all of an employee's regular wages (hourly pay, salary, bonuses, commissions, etc.) earned in a given week and dividing it by 40.  The overtime rate is then multiplied by 1.5.

This can make a very big difference in how much money an employee gets paid in overtime.

An Example

Assume a salesperson makes $24 per hour as a "base", makes an additional $1,000 per week in commissions and works 20 hours of overtime each week.

This person's employer most likely calculates his overtime pay by taking his hourly rate ($24) and multiplying it by 1.5 to arrive at an overtime rate of $36 per hour.  This equals $720 of overtime pay each week, or $37,440 per year.

What the employer should do is take the regular hourly pay for the week ($24 X 40 hours=$960) and add it to the commissions earned ($1,000) to arrive at the total weekly pay ($1,960).  This number should then be divided by 40 to arrive at a "regular rate" of $49.  This is multiplied by 1.5 for an overtime rate of $73.50 per hour.  This means the employee should be receiving $1,470 of overtime pay each week, or $76,440 per year.

So, each year this employer is getting away with paying the employee $39,000 less than he is legally entitled to!  Employees in California are entitled to recover up to four years of unpaid wages, which in this case equals roughly  $156,000.

Assuming there are ten such salespeople working for a company, this quickly adds up to over $1.5 Million over four years.

On January 1, 2007, California increased its minimum wage from $6.75 to $7.50 per hour.

Putting aside the fact that an extra 75 cents for each hour worked really has no effect on people's lives (just $1,560 per year before taxes), there are some "side effects" of this increase employees should be aware of.

Background

Under California law, the presumption is that all employees must receive overtime pay at 1.5 times their hourly rate. There are "exemptions" to this rule for employees who do certain jobs, such as managers, administrators, some commissioned salespeople and some professionals.

However, the "duties test" (what an employee actually does at work) is only one element that MUST be satisfied to determine if an employee is supposed to receive overtime.

The other major test that MUST be satisfied is the "salary basis" test. This test is two-fold. First, an employee must be paid on a salary basis, meaning they receive a set amount of pay each week no matter how many hours they work.

The "Side Effect"

The second part of the "salary basis" test is the main point of this post. An employee MUST receive twice the minimum wage to be exempt from overtime pay. Commissioned salespeople MUST receive 1.5 times minimum wage to be exempt. If this criteria is not met, these employees are automatically entitled to overtime pay.

Under prior law, employees had to receive $28,080 per year to be exempt (twice the minimum wage ($13.50) X 40 hours X 52 weeks), but now that number has risen to $31,200.

So, all employers who simply pay their employees a flat salary of $30,000 per year suddenly have employees who should be (and are not) receiving overtime pay as of January 1, 2007.

Many employers may not realize the "side effect" of this change in California law and they might not even know that the exemption is tied to the minimum wage in the first place.

Overtime pay is a legal entitlement--NOT a fringe benefit. If you do not meet the criteria for overtime exemption and do not receive overtime pay, you should do something about it.

Q: My employer terminated me today (December 31, 2006). I was supposed to receive a $10,000 performance bonus for 2006, but one of the terms of my bonus agreement says that I have to be employed on January 1, 2007 to get my bonus. The company is not doing very well and I think I was actually terminated so that they did not have to pay me the bonus. Can they get away with this?

--Unhappy New Year (CA)

A: I am sorry that this happened to you. Unfortunately, this is more common than most people think, but usually it is not so blatant. Often when managers start looking at their budgets at the end of the year and want to "trim the fat", they do this sort of thing to quickly save some cash at the expense of their employees.

You promised your employer you (1) would perform at a certain level during 2006 and (2) be employed on January 1, 2007. They in turn promised to give you a year-end bonus if you kept your promises to them.

In your situation, the only reason that you did not satisfy all of the conditions your employer placed on your bonus is because they essentially canceled the deal before you could finish.

This situation is similar to a common law school hypothetical. Say one person promises another person to give them $10,000 if they walk across a bridge. At the very last second before the person crossing the bridge reaches the other side, the other person yells out that he is canceling the offer.

California courts often look at situations like yours and determine what is "fair". It is likely that a court would decide that you complied with your bonus contract and it was only your employer's act of canceling your contract that kept you from finishing performance.

If so, you would be awarded your bonus as well as attorney's fees, costs, interest and possible penalties.