Areso v. Carmax, Inc.

In Areso v. Carmax, Inc., 195 Cal.App.4th 1996 (2011), a California Court of Appeals (Second Appellate District) held that Leena Areso, a Carmax salesperson, was properly classified as an exempt commissioned salesperson within the meaning of California Labor Code Section 204.1.  The court rejected Areso’s argument that the flat $150 per sale incentive pay she received was not “commission wages” as defined by Section 204.1, because it was not calculated as a percentage of the sales price of vehicles sold. The court interpreted the term “commission wages,” as used in Section 204.1, to include uniform (flat) payments to salespersons based on the number of units sold.

Areso is a pro-employer opinion, expanding the definition of “commissions” and offering employers flexibility in developing incentive compensation plans. The interpretation of Labor Code Section 204.1 adopted by Areso permits employers to compensate sales staff on a flat, per unit basis without invalidating their overtime exemptions. It should be noted, however, that Areso is inconsistent with enforcement guidelines published by California Division of Labor Standards Enforcement (DLSE). In contrast to Areso, the DLSE limits the overtime exemptions for commissioned salespersons to employees compensated “based on a percentage of gross or net sales.” Although DLSE enforcement guidelines are not controlling as legal authority, the unresolved conflict between the DLSE and the Court of Appeals creates confusion. Until the DLSE adopts the Areso holding, or the California Supreme Court provides clear guidance, California employers should proceed with caution, and consult human resources professionals before changing their commission policies.