To forego concerns about labor overtime, overtime claims, wage claims and to insure employee performance businesses often implement creative commission structures designed to benefit the motivated employee and the employer. California overtime and compensation laws are generally very protective of workers and the legal system for the most part protects workers against creative commission schemes.

In one such creative commission structure the employer attempted to circumvent the law by not paying commissions after the employee left, even if the commission was really earned by the former employee. In an environment of high employee turnover, which is often the case with sales persons, such a plan made perfect sense for the employer. Fortunately for the employer the plan was turned down by the California Division of Labor Standards Enforcement and the employer did not have to worry about future wage claims.

The employer sought an opinion letter before proceeding with the plan. In the plan it described a compensation system that included quarterly payouts of commissions on sales. The program also required current employment at the time of the quarterly commission payout. If the employee was not working at the time of the quarterly payment then no payment was due.

The Division of Labor Standard Enforcement advised that commissions on sales are waged calculated and owed upon the completion of the sale and must be paid in accordance with California Labor Law. Under California law wages earned are due and must be paid twice during each month on days designated in advance by the employer. Such a plan was deemed to be unacceptable as it was not compliant with existing law. Even if the plan did not provide for forfeiture of commissions it would still not be compliant, because it did not provide for payment of wages twice a week.

A labor attorney knowledgeable about labor laws is often very instrumental in helping a business stay out of trouble. A labor attorney is likewise very instrumental in helping an employee with wages and overtime lawsuits.

In this such case it was fortunate the employer was advised to seek such an opinion before attempting to implement the plan. Otherwise a workers attorney would eventually have picked up as a good wage claim to litigate.

In the opinion issued there was a reference to case where it was determined to not pay commissions where the orders were cancelled. That case was distinguished on the grounds that it was not unreasonable because of the period of time and the fact that no sale had actually occurred if there was a cancellation. The DLSE further added that this plan did not provide for a salary to be drawn against future commissions. The DSLE opinion letter stated that it is sometimes permissible to require that the contract upon which the commissions are based is not complete until payment of the contract price to the employer.

The DLSE conclude by summarizing as follows:

To summarize then, we would first point out that commissions
earned on a sale must be paid within the pay period pursuant to
the provisions of Labor Code Section 204. Withholding payment of
earned commissions until the end of a three-month period would be
a violation of California’s Labor Code. Additionally, any earned
commissions may not be forfeited. As pointed out above, reasonable
conditions may be placed on the vesting of the commissions; but once
vested, the commissions may not be forfeited as a result of the fact
that the employee terminates the employment. We might also point
out that common law contract doctrines (prevention) would prevent
an employer from forfeiting commissions which would have been
earned by discharging the employee before those commissions vest.

Generally speaking if there is some sort of unfairness to the compensation plan it will eventually result a workers attorney filing an overtime claim or some sort of labor law attorney filing a wage claim or labor law violation claim. The sure way to invited a workers attorney to file a claim for unpaid wages is to implement an inherently unfair compensation plan.

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California Overtime

Overtime, straight time and other compensation for entering a trainee programs is often an area of litigation. Training is often an area of litigation where overtime claims are filed to demand not only payment for overtime, but for straight time when wages are not paid, because the rules are often misinterpreted.

Overtime lawsuits arise when individuals feel their overtime rights have been violated, and sometimes they arise when trainees are unhappy because of training hours in excess of 8 hours per day. In many instances payment of wages is not required when the prospective employee is undergoing training. It depends on the specific circumstances of each individual case, but it is usually a matter of determining if the training is for the benefit of the employer or the trainee. One particular area where training is required under California Law is in the private security guard industry.

In a recent opinion letter the California Division of Labor Standards Enforcement determined that no wages were due when training security officers for private security companies under new laws that purport to regulate the industry. The opinion was cautious and tends to suggest that even though it can be used as guidance it should not mean to be interpreted as applying to all situations.

The opinion of the labor commissioner is that the time in the pre-employment training program does not require wage compensation under the facts presented in your letter. The letter focused on the required security officer training in order to be a registered security officer and not the licensing of a private operator. In rendering it is opinion the Division of Labor Standards Enforcement relied on a test it regularly uses to evaluate training programs and determine whether individuals are exempt from minimum wage requirements as trainees.

In this specific case the training was provided at no cost, but it did promise or guarantee employment, but it was required before any employment would be offered. The prospective employee had to also comply with other company hiring requirements.

The Divison of Labor Standards Enforcement also noted that no work was required as part of the training. No work was performed directly or indirectly in the participation for the private security operators. The participant’s training is for their own advantage and at not cost, which happens to be a requirement under federal and state laws that pertain to hiring interns without pay. The fact that an offer of employment could follow upon completion of the training program was determined to be insufficient to establish and employer employee relationship.

The Divison of Labor Standards Enforcement was satisfied that there was no employment relationship and therefore the trainee would not be entitled to overtime pay, straight pay, or any benefits. The DLSE also emphasized that a different result could ensue if there are assignments to work for, or individuals are allowed to work on behalf of, the training private security operator, because the trainee would be engaged, suffered, or permitted to work by the operator.

The focus is therefore on whether or not the employee is engaged in activities that could be construed as work done on behalf of the operator providing the training or if the training is for the benefit of the operator and not the trainee.

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Labor Overtime

Some of the highest paid employees in the country relative to their skill, education and knowledge are service workers that regularly receive tips. Dancers, waiters, waitresses, and bartenders often earn more than professionals including nurses and lawyers. It is not uncommon for a bartender to earn $80,000 a year or a dancer to earn $200,000 a year.

Often this leads to business managers and owners to take tip income from these workers and redistribute it or pocket it, or as a basis to set up a compensation system that does not comply with the labor code. Some employers pool tip income and distribute to all employees, some distribute on the basis of categories of jobs, and some include all employees. Some employers may attempt to use tip income in determining if the employee is getting paid minimum wage.

California law regulates gratuity and income and specifies what type of actions are prohibited. The California Division of Labor Standards Enforcement defines the term “gratuity”as follows. “Gratuity” includes any tip, gratuity, money, or part thereof, which has been paid or given to or left for an employee by a patron of a business over and above the actual amount due such business for services rendered or for goods, food, drink, or articles sold or served to such patron. Any amounts paid directly by a patron to a dancer employed by an employer subject to Industrial Welfare Commission Order No. 5 or 10 shall be deemed a gratuity. It defines the term “Business” as meaning any business establishment, or enterprise, regardless of where conducted.

The courts consistently have held that they will defer to the regulations established by such agencies as the Division of Labor Standards Enforcement and therefore the regulations are substantially law. Occasionally the court will reverse a DLSE order, but that is very rare.

The DLSE specifically states that:
No employer or agent shall collect, take, or receive any gratuity or a part thereof, that is paid, given to or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer. Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for. An employer that permits patrons to pay gratuities by credit card shall pay the employees the full amount of the gratuity that the patron indicated on the credit card slip, without any deductions for any credit card payment processing fees or costs that may be charged to the employer by the credit card company. Payment of gratuities made by patrons using credit cards shall be made to the employees not later than the next regular payday following the date the patron authorized the credit card payment.

The DLSE and the Labor Code specifically prohibit employers and their agents from taking, sharing, or receiving tip money left for employees. The term agent has been defined as every person other than the employer having the authority to hire or discharge any employee or supervise, direct, or control the acts of employees.

Tip pooling policies where waiters, waitresses, busboys, and bartenders share in the tips is deemed to be legal, because it is a long-standing practice in the restaurant industry. This was the opinion in the case of Leighton v. Old Heidelberg, Ltd., 219 Cal.App.3d 1062 (1990), but it was a split decision and may change in the future if appealed in a different district, but for now it is the law.

The DLSE also issued and opinion letter in 2005 , where it interpreted Labor Code section 351 to allow for a tip pool policy requiring the employee receiving the tip to contribute 15% of the actual tips to the tip pool and all money from the tip pool then to be distributed to the other employees in the “chain of service” based on the number of hours they worked, as is consistent with industry custom, provided:

1) Tip pool participants are limited to those employees who contribute in the
chain of the service bargained for by the patron, pursuant to industry custom
[examples of employees included in “chain of service” provided in Opinion Letter],
and

2) No employer or agent with the authority to hire or discharge any employee
or supervise, direct, or control the acts of employees may collect, take or receive
any part of the gratuities intended for the employee(s) as his or her own.

The DLSE also prohibits employers from making wage deductions from gratuities, or for using gratuities as direct or indirect credits against the employee’s wage and it also specifically disallows a recovery of credit card charges incurred by the employer.

Under federal law and employer can have an employment agreement with the employee that would allow an employer to employ so-called “tip credits” against wages owed to an employee, but the practice is illegal under California law.

California law requires every employer keep accurate records of all gratuities received by him, whether received directly from the employee or indirectly by means of deductions from the wages of the employee or otherwise. Such records shall be open to inspection at all reasonable hours by the DLSE. The employer to keep accurate records of any gratuity received by him through any means including credit cards and because of the requirement the burden of proof regarding amounts due em ployees from credit card charges would be on the employer.
The Court of Appeal held that any cost of doing business must be borne by the employer and not the employee. Inasmuch as credit card purchases are common, the cost of credit card charges are a cost of doing business. Thus this decision had been interpreted by DLSE to prohibit any deduction from the wages of employees by the employer to recover costs incidental to tips left for employees.

Sometimes employers attempt to get around these rules and pocket a large chunk of the tips by categorizing the employee as an independent contractor and renting space to the employee or setting some sort of an arrangement where the employee pays the employer instead or purchases supplies from the employer. The DLSE and the courts have both defined the characteristics of an independent contractor and these arrangements, rarely work, because the employee is an employee and not an independent contractor.

For a North San Diego County lawyer visit the author’s website.
Arnold Hernandez, attorney,overtime, personal injury, truck accident, car accident, dog bite, and wrongful death, Escondido, San Marcos, Vista, Oceanside, Carlsbad, Encinitas

Like the rat in the cage we are driven by rewards. It’s only human and also perhaps rat nature. Suffice it to say it’s nature.

So when compensation, the reward, becomes stagnant so does productivity. If like rats we are paid by the time we spend in the cage, then the expected level of productivity is simple compliance.

By focusing on minimum standards employees tend to get there and stay there; a comfort zone or twilight zone or Bermuda Triangle whatever else it can be called.

That comfort zone is not where you need nor want to be. Did you make a conscious decision to not do what is in the best interests of your company? Why? Don’t you ever ask what does your company need? What is the first step?

If you need to make changes, be wary of copying formulas. The best plan is the one that works best for your unique circumstances. Look first to your industry but also take a look outside your industry when looking for the right compensation plan.

The important thing is to first look for the concepts in compensation that drive your company’s performance and productivity.

Sometimes combinations of plans work the best. Simpler is better but sometimes by combining two measures, such as productivity and attendance; a compensation plan can be enhanced.

The best approach is to identify which key performance indicators should be the foundations for the compensation plan.

If you are going from a ‘time and space’ or hourly wage rate to an incentive plan then look for ways to start that change. There may be a great deal of reluctance on the part of your current employees but ask for their opinion. That way, once the plan is implemented there should be no complaints.

Talk about the new plan in your business, group and team meetings. You might start by using small gifts or cash rewards for top performance which helps employees get accustomed to the idea.

The idea is to try to modify your employee’s behavior little by little so it’s preferable to start small and gradually gain credibility. Actually rats do the same thing.

Use spreadsheets to work out the ranges of possible plans. Be wary of straight commission as it can often create internal friction. Don’t forget to look at tying part of your bonus or incentive plan to overall company performance.

Once you have a plan you can test backwards to see how it would work. Depending on your plan, you can do a trial run and see how employees react. Make certain that poor performance is not rewarded.

Establish a minimum performance level and make it the low end of your compensation scale. Make sure your plan is easily track able by both you and your employees.

Under ideal circumstances top performers should get at least two or three times more than minimal performers. Even if you are not able to create such a variation “skew” the better rewards should go toward top performance.

As with all incentives and bonuses it is important that the prize be something the employee considers of significance. Pure praise is fine but a cash reward or dinner for the family makes it tangible and real. To give someone a paltry bonus is the same as saying it does not matter. If it does not matter, why do it?

It is better to have a low base wage/salary with a large incentive component. If the base is too high there is little incentive to perform at higher levels.

Expect minimal employees to whine, complain and quit after the plan is in place. Expect to see more qualified and motivated employees wanting to join your company. Expect your better employees to become more loyal.

A well designed compensation plan can give your company a strong competitive advantage. Too bad your competitors may find it impossible to compete directly with you for the best employees.

Jack Deal is the owner of Jack D. Deal Business Consulting, Santa Cruz, CA. Related articlesmay be found at http://www.jddeal.com/blog/human_resources and http://www.freeandinquiringmind.typepad.com