California Frowns Upon Commission Wages

by Fred Jones, originally printed here

I have spent countless hours on the phone in recent months speaking with California salon owners in a panic about recent changes in our state’s labor laws, specifically how it relates to their long-held practice of paying their employees via commission wages.

Writers Note: For those of you applying your trade and making a living in the world of beauty outside of the Golden State, this story is a cautionary tale, especially if there’s any truth to the saying, “Where California goes, so goes the rest of the nation.”  See my prior columns about the importance of getting involved in your state’s legislative and regulatory arenas, so that similar developments don’t undermine the incentive pay approach in your state that have been popular in salons since time immemorial.

The purpose of this column is to provide context to these troubling policy reforms in the largest State in the Union, not to provide legal counsel as to how a California-based establishment can design a new compensation approach in conformity to these new laws.

That’s because I am not a labor law expert. I write this as a lobbyist who was deeply involved in last year’s passage of legislation (SB 490) and prior efforts to seek an alternative to the cumbersome “piece rate law” codified in AB 1513 of a few years back. If you are looking to conform to either the piece-rate law or the commission exception provided in SB 490, I encourage you to seek legal counsel and a good payroll service/software to help with the specifics of your salon’s wage approach.

These laws will now be enforced by California regulators and possibly pursued by the plaintiff’s bar, so salon employers ignore them at their own, financial risk.

Limits To Commissions

This may come as a shock to many, but for several years California statutory law and Court decisions have considered commission wages (as given in salons and other industry sectors) to be an illegal form of employee (and even booth rental) compensation. According to California law, commission wages can only be paid to an employee who is selling someone else’s product or service, not their own (think of a car salesman as an authorized example). So while it may be appropriate to earn commissions off retail product sales, it is not so for commissions tied to beauty services.

California labor law provides only two exceptions to that ban on providing stylist-employees a percentage of the revenues they help generate via their beauty services, namely: (a) piece-rate bonuses or (b) SB 490’s commission exception. I will attempt to explain each in order, but allow me first the opportunity to provide the policy basis for these recent and seemingly inexplicable reforms.

California’s Legislature and current Governor believe employees lack the bargaining power of employers. Therefore, to protect workers’ rights from this unlevel playing field, they support laws that set minimum requirements upon employers. That is the reason our state’s minimum wage is legally mandated and set to rise indefinitely.

Our state policymakers — or at least the majority of them — also believe a commissions approach to paying one’s employees is fraught with potential exploitation, especially during those times when an employee isn’t actively engaged in the service that’s earning those commissions.

Piece-Rate Wages

To rectify their concerns and to codify a series of case law decisions relevant to the old “piece-rate” wage law, California’s policymakers passed AB 1513, which went into effect January 2016.

That law and its subsequent interpretation and implementation by the California Department of Industry Relations require employers who want to reward their employees with payment for completing a particular service to follow a detailed pay calculation. In short, AB 1513 requires salon owners to pay their stylists a commensurate amount for their productive time as well as their rest, recovery or non-productive time.

Employers cannot incentivize their employees to skip their statutory right for rest/recovery periods, nor can they penalize them for their non-productive time when they are under the employer’s control. It is illegal under the “piece rate wage” law to pay employee-stylists more when they’re performing their services and less (or not at all) when they are between clients or taking their legal breaks.

Piece-rate compensation is an exception to the ban on commissions, but it requires significant payroll monitoring and paperwork. The employer has to track in each pay period all the rest/recovery and non-productive time of the stylist-employees to ensure that they earn commensurate pay as received during their productive time. This obviously inflates wages paid to employees during such non-productive time (i.e., when they’re not doing services and earning a piece of the action, so to speak).

A detailed explanation of “piece rate compensation” can be found here: http://www.dir.ca.gov/pieceratebackpayelection/AB_1513_FAQs.htm

SB 490 Commission Exception

In an attempt to provide our industry an alternative, less cumbersome means around California’s rather broad prohibition against commission wages, the national PBA sponsored a bill, SB 490 (Bradford). For clarity sake, my organization is not legally or any other way affiliated with the PBA.

This new law advocated by the PBA allows a salon owner to pay an employee-stylist on a commission basis, but only in addition to a base hourly rate of twice the minimum wage. California’s current minimum wage is $10.50/hr, so a salon owner would have to pay a stylist-employee $21/hr for all hours worked PLUS any commission amount above and beyond that base rate. By 2022, that base wage rate would be $30/hr (since our state’s minimum wage will be $15/hr, then).

How many California salons will be in the position to pay their stylists $30/hour and then have the ability to add commissions on top of that amount?  The SB 490 option is clearly out of reach of the vast majority of salons.

It’s also important to note that none of the base hourly wage can include offsets from tip income, which in California are considered the separate earnings of an employee that cannot be used as a means of supplanting wages.

My organization lobbied hard to get policymakers to acknowledge this unnecessarily high, arbitrary hurdle, requesting they either remove the twice-minimum base wage requirement entirely from SB 490, or reduce it to the state’s statutory minimum wage. Unfortunately, our repeated calls for a more realistic base rate were rejected — given the ongoing concerns of workers being exploited by commission compensation agreements.

We then asked for an amendment that would allow tip income to be part of the twice-minimum base, but that, too, was denied, given the long history of prohibiting the mixing of tips and wages in our state.

So even though it has been the long-held practice of our industry to pay stylists on a commission basis (some on flat commissions, others blended with minimum wage plus commissions), those pay structures are no longer legal in California. And the only two exceptions — “piece rate” or SB 490’s “twice-minimum” — are either too cumbersome or cost-prohibitive for most salons.

The PBFC will continue to make our case to lawmakers, given these new laws actually hurt the very population they were intended to protect. That’s because many salons will discontinue providing their stylists incentive pay opportunities and move to a flat, hourly wage. While others may simply succumb to the temptation to move toward a booth rental structure, relieving themselves of California’s costly labor laws, while sending their booth rental stylists adrift.

If there’s a single phrase that captures my 25 years of policy making experience in Sacramento, it’s the law of unintended consequences, a principle that continues to prevail in California’s micromanaged labor market.