Law360, San Diego (July 14, 2014, 11:02 PM ET) — Rejecting Time Warner Cable Inc.’s defense in a proposed overtime class action, the California Supreme Court held Monday that employers can’t satisfy the state’s compensation requirements by carrying over commission wages from one pay period to other pay periods, a ruling that restricts how employers pay commissioned workers and could trigger more wage-and-hour class actions, lawyers say. 

Time Warner argued that a former account executive’s commissions, which were always paid on the final biweekly payday of each month, could be attributed to the weeks of the preceding month to meet the commissioned employee exemption’s minimum wage prong, but the California Supreme Court disagreed that the employer could treat commissions in this way.

“Whether the minimum earnings prong is satisfied depends on the amount of wages actually paid in a pay period,” Justice Carol Corrigan wrote in the unanimous decision. “An employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall.”

The pro-employee ruling interprets wage-and-hour laws very narrowly and holds that nothing in the Labor Code or wage orders allows for employers to decide how wages are spread over time, according to Lonny Zilberman, a partner of Wilson Turner Kosmo LLP.

“The court doesn’t want to start creating a slippery slope for employers to determine when they are going to be making commission payments to employees,” he said. “This case is likely to affect so many industries, from consumer electronics to car dealerships. It affects any inside sales people working in a call center or store.”

Susan Peabody, a former Time Warner account executive who earned commissions selling advertising, asserted in her suit that because she collected commissions in only some pay periods, she did not earn 1.5 times the minimum wage in the other pay periods as required for employees to qualify for the commissioned sales exemption under California law. As a result, she said, the company misclassified her as exempt from overtime for weeks during which she did not earn commissions. Meanwhile, Time Warner argued that Peabody earned nearly $75,000 during 10 months with the company, more than compensating her for any overtime she had worked.

After a federal court granted summary judgment to Time Warner, Peabody appealed the case to the Ninth Circuit, which in 2012 asked the California Supreme Court for input on whether employers could allocate commission payments over multiple pay periods when calculating minimum wage. Now that the California high court has answered that question with a resounding “no,” the case heads back to the Ninth Circuit, which is expected to revive the proposed class action and remand to the district court, according to attorneys.

“The California Supreme Court ruled that commissions paid in one pay period can’t be attributed to other pay periods to meet [minimum wage] obligations,” said Christopher Olmsted, a shareholder of Ogletree Deakins Nash Smoak & Stewart PC. “Any employers with commissioned employees are going to have to look at refraining from making commission payments to workers on a monthly basis if there’s a threat it will result in employees not earning sufficient wages in any given pay period.”

Because commission plans like Time Warner’s are not uncommon, more employers are likely to be drawn into class actions alleging they improperly classified sales employees as exempt from overtime, according to lawyers.

“Plaintiffs attorneys out there are going to take note of this case and take the opportunity to litigate this matter,” Olmsted said. “It’s time for employers to quickly reconsider their commission policies to make sure they are not receiving the brunt of the litigation.”

Employers may see an uptick in overtime litigation until they catch up with the decision and update their payment plans to commissioned employees, according to Sean Pon of Hinshaw & Culbertson LLP.

“There are a lot of sales jobs where commissions are accrued on a less regular basis — like monthly or quarterly — and the hourly pay is a lower amount that is under the minimum wage … and as of today, those companies are at risk,” he said. “Until they change their policy or raise their hourly pay, they are facing the risk of litigation as they go forward.”

With the burden shifting to employers to show an employee is satisfying the minimum earning requirement for each pay period, employers may need to rewrite their commission plans to conform to the decision, according to Zilberman.

“Employers can avoid problems by guaranteeing commissioned employees 1.5 times the minimum wage, or $13.50 an hour, and have it be drawn against their commissions,” he said. “I could see a scenario where employers pay the same amount they would have paid, but in a different fashion by putting more money up front and not waiting to figure out what the commissions are.”

In its decision, the California Supreme Court noted that making employers actually pay the required minimum amount of wages in each pay period is consistent with the enforcement policies of the state’s Division of Labor Standards Enforcement that hold employers can’t satisfy the commissioned employee exemption by deferring any part of the wages due for one period until payment of the wages due for a later period.

“Although the DLSE’s enforcement policies are not entitled to deference, we adopt its interpretation having independently determined that it is correct,” Justice Corrigan wrote.

The California Supreme Court also shot down Time Warner’s argument that its wage attribution practices are permitted by federal law, holding that it has previously cautioned companies against confounding federal and state labor law where the language or intent of state and federal laws differ substantially.

“Unlike state law, federal law does not require an employee to be paid semimonthly,” Justice Corrigan wrote. “It also permits employers to defer paying earned commissions so long as the employee is paid the minimum wage in each pay period. In light of these substantial differences from California law, reliance on federal authorities to construe state regulations would be misplaced.”

This particular finding is a prime example of where employers need to abide by both federal and state law, but can’t rely on federal law alone to comply with state law, according to Olmsted. It also shows an area where employers are going to need guidance from attorneys.

“It’s complicated to determine whether state and federal law differ, and it’s easy for employers to go in the wrong direction by not doing enough research or not seeking legal advice,” he said. “To avoid making mistakes in these areas involving exemptions to wage-and-hour laws, employers should seek clear advice from labor counsel before moving forward.”

Attorneys representing Peabody and Time Warner did not return calls seeking comment Monday.

Peabody is represented by Brian Van Vleck of Van Vleck Turner & Zaller LLP.

Time Warner is represented by Joseph W. Ozmer II and J. Scott Carr of Wargo French LLP.

The case is Susan Peabody v. Time Warner Cable Inc., case number S204804, in the Supreme Court of the State of California.

–Editing by Jeremy Barker.