Toby Harris and several
others were telemarketers who sold subscriptions to the Los Angeles-based
financial newspaper, Investor’s Business Daily (IBD). Their pay was
based on a point system that rewarded them for selling longer subscriptions,
winning daily sales contests, and meeting weekly sales goals.
The telemarketers were
also subject to a “chargeback,” which was a deduction from points earned on a sale
if the customer cancelled the subscription within 16 weeks. In addition, the
telemarketers’ compensation plan provided that employees were paid the greater
of commissions earned on paid subscription sales or the prevailing minimum wage
for hours worked.
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.
Class Action Suit Filed
Harris and other
telemarketers filed a class action lawsuit against IBD. They alleged IBD didn’t
pay overtime as required under
law and the federal Fair Labor Standards Act (FLSA). They also claimed that the
chargeback practice violated California Labor Code Section 221, which prohibits
an employer from taking back any wages from an employee after they are earned. Finally,
the telemarketers charged that the wage and hour violations amounted to illegal
business practices under
unfair competition law.
IBD countered that the claim under the state’s unfair competition law.
employees qualified for the commissioned employee exemption from overtime. It
also argued that the chargeback practice was legal because a commission wasn’t
actually earned until the subscriber had been a customer for 16 weeks, and any money
on that sale paid to the employee in the meantime was merely an advance on
commissions earned— so chargebacks were just a recovery on an advance. IBD also
contended that violations of federal overtime law weren’t a proper basis for a
Commission Exemption
Explained
The lower court dismissed
the case, but now a
appeals court has reversed and sent the case back for trial.1
With respect to overtime
exemption, the appeals court explained that any employee whose earnings exceed
11/2 times the minimum wage,
with more than half of that compensation being commissions, qualifies for
exemption from overtime pay. The exemption applies as long as the employee
sells a product or service and the compensation is a percent of the price of
the product or service. The exemption is only for salespeople covered by Wage Orders
4 and 7 (a similar exemption exists under the federal FLSA).
The court concluded that
there was an open question as to whether IBD’s point system was an
exempt-qualifying commission scheme. The court pointed to evidence that points
were based on the type of subscription sold, rather than tied to the dollar
amount of the subscriptions sold, and points received from bonuses and sales
contests also weren’t based on the price of subscriptions.
Even if the points
system qualified as an exemptcommission plan, IBD didn’t show that the
telemarketers received more than half their compensation through commissions
and that they received more than 11/2 times the minimum wage.
When Chargebacks Are Legal
The court then turned to
whether the chargeback policy was legal. Chargebacks are invalid if the
commission is earned when the sale is made, because then any chargeback is
taking back a wage that was already earned, which violates Labor Code Section
221. However, if commissions are earned only after the customer keeps the
subscription for at least 16 weeks, any amounts paid before that 16-week limit
would merely be an advance— and not a wage—so a chargeback would be acceptable.
Here, said the court,
IBD’s written commission/chargebacks policy was unclear as to whether points on
a sale were earned at the time of the sale rather than at some designated point
in the future. Adding to this uncertainty was the company’s amending of its
policy, after the lawsuit was filed, to specify that commissions will be advanced
when a sale is made, but that no commission is earned if a customer cancels a
subscription within the first 16 weeks.
The court went on to
point out that the employees here didn’t approve of the original chargeback policy
in writing, so they might not have been aware of it. In previous cases
upholding chargebacks, employees had agreed to the policies.
Unfair Competition
Claims Go Forward
Finally, the appeals
court reversed the lower court’s dismissal of the unfair competition claims.
First, if the chargebacks were illegal, a jury could find that the chargeback
practice unjustly enriched IBD—because even though the chargeback was for the
full amount of a cancelled subscription, IBD kept for itself the entire payment
received for the short portion of time the customer did receive the newspaper.
Second, the court said that the federal FLSA doesn’t preempt
seeking payment for employees of unpaid FLSA overtime.
You can find this case
online at www.courtinfo.ca.gov/opinions/.
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1 Harris v. Investor’s
Business Daily Inc.,
Court of Appeals (Dist. 2) No. B178428, 2006