• Recruiter Qualified under California Commissioned Salesperson Exemption, Not Entitled to Overtime
  • February 16, 2012 | Author: Jamerson C. Allen
  • Law Firm: Jackson Lewis LLP - San Francisco Office
  • Ruling a recruiter was a commissioned salesperson because his job involved sales and his compensation was based on those sales, the California Court of Appeal, Fourth Appellate District, has rejected an employee’s claims for unpaid overtime against his employer on behalf of himself and a class of current and former employees.  Muldrow v. Surrex Solutions Corp., Nos. D057995 & D058958 (Cal. Ct. App. Jan. 24, 2012).  The Court found the employee was exempt from overtime pay under California Industrial Welfare Commission Wage Order No. 7-2001 and affirmed judgment in favor of the employer.

    Tyrone Muldrow worked for Surrex Solutions Corporation as a “consulting services manager.”  He recruited candidates for employment positions with the company’s clients; his general job duties included account development, sales, account management, and recruiting.  Clients would place job orders with the company and a consulting services manager would search for potential candidates.  The company was paid only upon successfully placing a candidate.

    The company paid its consulting services managers a draw ranging from approximately $3,000 to $5,500 per month against future commissions. Consulting services managers also received an amount in excess of the guaranteed draw when their lifetime commissions earned as of that pay period were greater than the lifetime draw payments as of that same date.   Muldrow’s annual income averaged between $270,000 and $300,000, an amount far in excess of his $60,000-per-year guaranteed draw.

    Muldrow filed a class action against the company alleging, among other things, that it failed to pay him overtime in violation of the California Labor Code.  At trial, the company argued it was not required to pay him overtime because Muldrow was a commissioned employee and exempt pursuant to California Industrial Welfare Commission Wage Order No. 7-2001.  Cal. Code. Regs., tit. 8, § 11070(3)(D).  The trial court agreed, finding Muldrow was an exempt commissioned employee, and entered judgment for the employer.  Muldrow appealed.

    Applicable Law
    Wage Order No. 7-2001 exempts from overtime “any employee whose earnings exceed one and one-half times the minimum wage if more than half of that employee’s compensation represents commissions.”  To determine whether an employee falls within this exemption, California courts examine (1) whether the employee is involved principally in selling a product or service, and (2) whether the amount of the employee’s compensation is a percent of the price of the product or service.  Keyes Motors, Inc. v. Division of Labor Standards Enforcement, 197 Cal. App. 3d 557, 563 (Cal. Ct. App. 1987).

    Appeal Rejected
    As a Recruiter, Muldrow Engaged in Sales

    Muldrow first argued he was not primarily engaged in sales activities.  The Court found the evidence showed the contrary.  Muldrow’s employment agreement with his employer included sales as part of his duties.  Testimony from the company’s executives showed that the company viewed Muldrow’s recruiting activities as sales.  Muldrow’s activities of searching for candidates, cold calling, interviewing candidates, inputting data, and submitting resumes were “the essential prerequisites necessary to accomplishing the sale,” according to the Court.  “Reduced to its essence,” the consulting services manager job, the Court found, was to offer a candidate’s services to a client in exchange for a fee; this met “the ordinary definition of the word sell.”  Accordingly, the Court concluded Muldrow satisfied the first part of the commissioned employee exemption.

    Compensation Related to Fees

    Muldrow then argued he did not satisfy the second prong of the test because his commissions were not entirely related to the company’s fees.  While he conceded that when a candidate is hired directly, he received a straight commission of a percentage of the placement fee, he argued that when clients contracted with a candidate to be a consultant for a time, he received a percentage of the gross profits earned from these placements which, he argued, is not commission.

    The Court found the compensation plan was based primarily on the fees earned by the company, to which other cost-related factors were added.  It declined to limit “commission” to only a straight percentage of sales, noting that this did not comport with the modern definition of “commission,” which includes payments derived from profits, or California case law, which has recognized such compensation plans as commissions.

    Compensation Plan was Bona Fide

    According to the California Division of Labor Standards Enforcement’s Enforcement Policies and Interpretations Manual, “consistent commission earnings below, at or near the draw are indicative of a commission plan that is not bona fide.”  The Court found that Muldrow consistently received payments far in excess of his guaranteed draw.  Thus, it rejected Muldrow’s argument that the company’s compensation plan was not bona fide.

    * * *

    While this decision is welcome news for employers in California, whether an employee is a commissioned salesperson and exempt from overtime remains highly fact-sensitive.  In addition to state overtime laws, employers also must consider the federal Fair Labor Standards Act’s overtime provisions, which narrowly limit the exemption for inside commissioned sales employees to those in the retail or service industries, as defined under the FLSA.

    This article is a general summary of Muldrow.  Given the complexities involved in determining overtime entitlement, employers should consider addressing specific scenarios with the assistance of counsel.