MULDROW v. SURREX SOLUTIONS CORP. No. D057955, D058958.
202 Cal.App.4th 1232 (2012)
136 Cal. Rptr. 3d 382
TYRONE MULDROW et al., Plaintiffs and Appellants, v. SURREX SOLUTIONS CORPORATION, Defendant and Respondent.
Court of Appeals of California, Fourth District, Division One.
January 24, 2012.
Hogue & Belong, Jeffrey Lee Hogue , Tyler J. Belong , Tony R. Skogen, Jr. ; Law Offices of John S. Addams, Niddrie, Fish & Addams and John S. Addams for Plaintiffs and Appellants.
Gibbs & Fuerst, Michael T. Gibbs and Kevin L. Borgen for Defendant and Respondent.
In this appeal from a judgment after a bench trial, we consider whether the trial court erred in determining that an employer was not required to pay overtime wages (Lab. Code, § 510)
FACTUAL AND PROCEDURAL BACKGROUND
Tyrone Muldrow filed this action against Surrex Solutions Corporation (Surrex) on behalf of himself and a class of current and former Surrex employees. In his complaint, Muldrow brought causes of action including failure to pay overtime (§ 510) and failure to provide meal periods (§ 512), among other claims. The trial court certified a class of current and former Surrex "senior consulting services managers," who formerly worked (or were currently working) as employment recruiters for Surrex, since January 31, 2004.
At a bench trial of the class members' claims, Surrex asserted that it was not required to pay overtime to the class members because they were subject to the commissioned employees exemption (Cal. Code Regs., tit. 8, § 11070, subd. 3(D)) and the administrative employees exemption (id., subd. 1(A)(2)). Surrex also contended that it had provided meal periods to the class members, as required.
The trial court determined that the class members were subject to the commissioned employees exemption. The trial court further concluded that Surrex had provided meal periods for the class members, and that the law did not obligate Surrex to ensure that the employees utilized the meal periods. Because these determinations disposed of the action, the court did not proceed to determine whether the class members were subject to the administrative employees exemption. The court entered judgment and a postjudgment award of costs in favor of Surrex.
Appellants filed an appeal from the judgment in which they claim that the trial court erred in determining that the commissioned employees exemption applied to them and that they were therefore not entitled to overtime. In addition, appellants claim that the trial court erred in denying their claim for missed meal periods.
A. The trial court did not err in determining that appellants were not entitled to overtime pay because they were subject to the commissioned employees exemption
Appellants claim that the trial court erred in determining that Surrex was not required to pay them overtime (§ 510) because they were subject to the commissioned employees exemption (Cal. Code Regs., tit. 8, § 11070, subd. 3(D)).
1. Standard of review
Appellants' contention raises a mixed question of law and fact. (Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 794 [85 Cal.Rptr.2d 844, 978 P.2d 2] (Ramirez) ["The question whether Ramirez was an outside salesperson within the meaning of applicable statutes and regulations is, like other questions involving the application of legal categories, a mixed question of law and fact."].) Mixed questions of law and fact are reviewed de novo, where the claim to be reviewed is "predominantly one of law." (In re Marriage of Sonne (2010) 48 Cal.4th 118, 124 [105 Cal.Rptr.3d 414, 225 P.3d 546].)
In this appeal, appellants contend that the trial court erred in determining that they were subject to the commissioned employees exemption, in light of undisputed facts pertaining to both their employment duties and Surrex's compensation system. We apply the de novo standard of review to this claim, since the claim raises a question of law. (See Ramirez, supra, 20 Cal.4th at p. 794 [applying de novo standard of review because, "[i]n the present case, although there was some controversy as to the facts—i.e., as to what Ramirez did as an employee for Yosemite—the predominant controversy is the precise meaning of the term `outside salesperson,' a question of law."].)
2. Governing law
a. Relevant statutory and regulatory provisions
California's Industrial Welfare Commission (IWC) wage order No. 7-2001 exempts from this statutory overtime compensation requirement "any employee whose earnings exceed one and one-half (1 1/2) times the minimum wage if more than half of that employee's compensation represents commissions." (Cal. Code Regs., tit. 8, § 11070, subd. 3(D).)
b. Relevant case law
In Keyes Motors, Inc. v. Division of Labor Standards Enforcement (1987) 197 Cal.App.3d 557 [242 Cal.Rptr. 873] (Keyes Motors), the Division of Labor Standards Enforcement (DLSE) determined that an employer that sold and serviced automobiles was required to pay overtime wages to its mechanics. The employer sought a judicial declaration that it was not required to pay overtime wages to its mechanics because the mechanics' compensation, which was based on a percentage of the hourly rate charged to customers for repairs, constituted "commission wages." (Id. at p. 560.) The trial court granted the requested relief. (Id. at p. 561.)
In applying the first of these requirements, the Keyes Motors court stated, "Common sense militates against conceiving of auto mechanics as `commission salesmen' any more than plumbers or electricians simply because their employers sell automobiles." (Keyes Motors, supra, 197 Cal.App.3d at p. 564.) The court also commented, "`[t]he DLSE's interpretation is entitled to great weight ....' [Citation.]" (Ibid.) Ultimately, the Keyes Motors court held that the trial court had erred in determining that the mechanics were subject to the commissioned employees exemption. (Ibid.)
In Ramirez, our Supreme Court considered the meaning of "outside salesperson" as used in section 1171 in determining whether an employee who engaged in sales and who performed delivery functions for a bottled water company was exempt from the state's overtime laws. (Ramirez, supra, 20 Cal.4th at p. 794.) After concluding that the trial court and the Court of Appeal had erred in their interpretation of section 1171, the court remanded the case to the trial court to make a factual determination as to whether the employee was in fact an "outside salesperson." (Ramirez, supra, at pp. 801, 803.)
As relevant to this case, the Ramirez court observed that the trial court had also concluded that the employee was subject to the commissioned employees exemption. (Ramirez, supra, 20 Cal.4th at p. 794.)
"Ramirez was compensated at a flat rate of $1,200-$1,400 per month, plus a percentage of the price of the bottles of water and related products sold when sales exceeded the flat rate. The parties dispute whether or not the $1,200-$1,400 sum represented a `draw' against future bottle sales, or was more in the nature of a salary. But regardless of which it was, and regardless of whether Ramirez's compensation could be characterized as `a percentage of the price of the product or service,' it is not at all clear that the first condition set forth by the Keyes [Motors] court was met. As discussed above, it remains to be clarified on remand whether Ramirez was `involved principally in selling the product or service.' Because our determination of whether Ramirez was a commissioned employee depends partly on matters to be decided by the trial court on remand, we believe this question is also best resolved on remand." (Ramirez, supra, 20 Cal.4th at pp. 803-804.)
In Harris v. Investor's Business Daily, Inc. (2006) 138 Cal.App.4th 28 [41 Cal.Rptr.3d 108] (Harris), the Court of Appeal considered whether the commissioned employees exemption applied to a group of telemarketing employees who sold magazine subscriptions. In considering the first prong of the Keyes Motors test for determining the applicability of the exemption, the Harris court noted that it was undisputed that the telemarketers sold a product. (Harris, supra, at p. 37.) Thus, according to the Harris court, in determining whether the employees were exempt, the only question was "whether they were paid on the basis of a percentage of the price of subscriptions sold." (Ibid.) The employees in Harris were paid based on a point system in which they earned points related to the number of subscriptions sold.
The Areso court distinguished Keyes Motors and its progeny, stating, "The Keyes Motor['s] definition of `commission' ... does not control our case, as it does not exclude Areso's compensation from the ambit of section 204.1's definition of commission wages as `based proportionately upon the amount or value' ...." (Areso, supra, 195 Cal.App.4th at p. 1006, italics added.) Accordingly, the Areso court held, "CarMax's uniform payment for each vehicle sold constitutes commission compensation under section 204.1." (Id. at p. 1009.)
3. The class members' compensation constituted commissions
Appellants claim that they were not subject to the commissioned employees exemption because they were not primarily engaged in sales, their commissions were not based on price, and Surrex's compensation system was not a bona fide commission system. We consider each argument in turn.
a. Appellants were engaged principally in selling a service
Applying Keyes Motors and its progeny, we first consider whether appellants were employed "principally in selling a product or service." (Keyes Motors, supra, 197 Cal.App.3d at p. 563.)
i. Factual background
Appellants' primary job duty was to recruit "candidates" for employer "clients." Surrex's clients would place "job orders" with Surrex and appellants would search for potential candidates to fill the job orders. Appellants would use various resources to find candidates, including an internal database that Surrex maintained and various "on-line job boards." Appellants would then attempt to convince both the candidate and the client that the placement of the candidate with the client was a proper fit. Michael Ellis, an executive vice-president for Surrex, described this part of the process as follows: "We have to convince the candidate that they're the right person, that this position is the right place for them. We have to convince them on dollars. We have to convince the client that this is the right person for them. We prep both sides. When they get together on the interview, that's where hopefully the magic happens. [¶] Then again, after they've met, we need to debrief both the client and the candidate to make sure to pull it together. Then we have to make sure to nail down the sides of the tent that have to do with rate, the client's rate, the candidate's rate, and then make sure it all comes together. It's a very difficult sale."
Surrex obtained revenue from a client only in the event of a successful placement. As Ellis testified, "The only money Surrex gets is when a client hires on the people that we find for them, and we bring them on as either an employee or a subcontractor to Surrex."
Appellants' employment agreements state that their duties and responsibilities include, "[a]ccount development, sales, account management, and recruiting." (Italics added.) Surrex's employees and executives testified that appellants were engaged in selling. For example, when asked to describe the traits of a successful consulting service manager, Ellis testified that the company looked for "highly motivated salespersons," stating, "It's all sales." Ellis also testified, "[I]f someone were to come to me and interview for a job at Surrex and tell me that they did not believe that recruitment is sales, ... I would ask them to leave. They would not be hired." Robert Bishop, a senior consulting service manager at Surrex, testified "when I'm acting in a recruiting capacity,
The evidence discussed above demonstrates that appellants' job, reduced to its essence, was to offer a candidate employee's services to a client in exchange for a payment of money from the client to Surrex. Offering a candidate's employment services in exchange for money meets the ordinary definition of the word "sell," which is "to give up (property)
We also reject appellants' contention that time spent "searching on the computer, searching for candidates on the website, cold calling, interviewing candidates, inputting data, and submitting resumes," may not be considered sales-related activities. We agree with the trial court's reasons for rejecting this argument: "[P]laintiffs point to the number of activities the employees are engaged in prior to the actual point in time that the sale is made. This argument perceives the word sales in a vacuum contrary to the job description of any salesman. The whole point of these activities, including online search for candidates, resume reviews, unsolicited (cold) calls, etc., are the essential prerequisites necessary to accomplishing the sale."
b. Appellants' commissions were sufficiently related to price
We next consider whether Surrex's commissions were sufficiently related to the price of services sold to constitute commissions for purposes of the commissioned employees exemption.
i. Factual background
Surrex generally placed candidates with clients in one of two ways. Some candidates were hired directly by employer clients. For these so-called "direct hire" placements, appellants received a commission equal to a percentage of the placement fee that Surrex received from the client. Appellants concede that such payments constitute commissions for purposes of the commissioned employees exemption.
Surrex placed other candidates by hiring them as consultants. The candidate-turned-consultant would then perform work for the client, and Surrex would in turn bill the client at an hourly rate for the consultant's services. As Glenn Crawford, an executive vice-president for Surrex, testified, "[The client] essentially leases [the candidate] from [Surrex] on an hourly basis." Appellants received a percentage of the "adjusted gross profit," that Surrex earned from the clients as payment for their placement of these candidate/consultants. Adjusted gross profit was defined generally as the rate at which clients were billed for a consultant, less the costs to Surrex of employing the consultant. Costs included the consultant's pay rate, benefits and expenses, as well as an overhead adjustment factor.
The precise formula for consultant commissions is specified in appellants' employment agreements. That formula states in relevant part: "The commission in the consulting business is earned at a starting rate of 32% of adjusted gross profit .... The adjusted gross profit is calculated as follows: AGP = bill rate - (pay rate + burdened overhead + benefits + expenses). In most periods, billable consultants' expenses are zero. In most cases benefits are zero for W-4 hourly consultants. For W-4 salaried employees, benefits include all associated costs, including vacations, sick leave and bench time. Burdened overhead is 0.14 X pay rate."
Appellants contend that money they were paid pursuant to Surrex's consultant commission system does not qualify as commissions for purposes of the commissioned employees exemption. Specifically, appellants maintain that the formula is "too complex," since it is based on several cost-related factors in addition to price. Appellants argue: "[T]he commission formula for consulting placements was far too complex to fall within the exemption. Rather than simply being based on a percentage of the service price as the commission for direct hire placements was, the consulting placement commission lost touch with the service price once it became entangled with the adjusted gross profit, which was defined as the bill rate less the pay rate plus burdened overhead, benefits, and expenses."
Appellants acknowledge that Surrex's consultant commission system "started with calculating the commission based on ... service price," but contend that California case law precludes Surrex from utilizing any other factors in determining their commissions. In support of this contention, appellants quote Keyes Motors, and in particular, the Keyes Motors court's paraphrasing of section 204.1 as requiring that "the amount of their compensation must be a percent of the price of the product or service" (Keyes Motors, supra, 197 Cal.App.3d at p. 563). Appellants also cite the Supreme Court's application of this requirement in Ramirez, supra, 20 Cal.4th at pages 803-804.
In this case, in contrast, appellants affected not only the revenue that Surrex received, but also the costs that Surrex would bear. Paige Freeman, a senior consulting services manager, testified that consulting service managers negotiated both the rates that Surrex paid candidate/consultants and the rate at which Surrex billed clients for those services.
Appellants' contention that the term "commissions" in the relevant regulation (Cal. Code Regs., tit. 8, § 11070, subd. 3(D)), should be interpreted to include only those commissions that are based strictly, and solely, on a percentage of the price of the product or service rendered constitutes an excessively narrow and wooden application of Keyes Motors and Ramirez. Such a limited definition would not comport with the contemporary legal sense of the word "commission."
Finally, the sole argument that appellants offer to support their contention that the term "commissions" in the commissioned employees exemption (Cal. Code Regs., tit. 8, § 11070, subd. 3(D)) should be construed as excluding commission systems such as Surrex's, is that such a formula is "too complex." Appellants' contention that the Surrex's commission system is "too complex" is neither factually accurate nor legally relevant. The formula was clearly stated in the employees' employment agreements and, in most cases, could be calculated simply by knowing the candidate's "bill rate" and "pay rate" (both of which the consulting service managers, themselves, negotiated).
4. Surrex's compensation plan constituted a bona fide commission system
Appellants contend that they were not subject to the commissioned employees exemption because Surrex's compensation plan did not constitute a "bona fide" commission system "as a matter of law."
a. Factual background
After a brief startup period, Surrex paid each consulting service manager a draw ranging from approximately $3,000 to $5,500 per month. A draw is an advance on commissions to be earned in the future. Consulting service managers earned commissions as described in part III.A.3.b.i., ante. Surrex paid each consulting service manager an amount in excess of the guaranteed draw whenever his or her lifetime commissions earned as of the date of that pay period were greater than the lifetime draw payments as of that same date.
b. Governing law
Crawford testified that during the relevant time period, "seven to ten" consulting services managers consistently received payments in excess of their guaranteed draw. In addition, one of Surrex's senior consultant service managers, Robert Bishop, testified that his annual income at Surrex over the past three years had averaged between $270,000 and $300,000—an amount far in excess of his $60,000-per-year guaranteed draw. Bishop also testified that approximately two-thirds of Surrex's current workforce had been paid commissions in excess of their draws. David Hattman, another Surrex consulting service manager, testified that he "routinely" received compensation in excess of his draws. In light of the foregoing evidence, we reject appellants' contention that Surrex's commission system "was not bona fide as a matter of law."
B. Appellants have not demonstrated that the trial court erred in denying appellants' missed meal period claim
As of the date of the filing of this opinion, the Supreme Court has not decided Brinker. Although appellants contend that the trial court erred in denying their missed meal period claim, they raise this claim solely to preserve their right to petition the Supreme Court on this issue. Accordingly, we conclude that appellants have not demonstrated that the trial court erred in denying appellants' missed meal period claim.
The judgment and postjudgment order awarding costs are affirmed. Surrex is entitled to costs on appeal.
McConnell, P. J., and McIntyre, J., concurred.
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