Jessica M. Semins  |  November 16, 2020

Category: Labor & Employment

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Wedbush Securities advisors are entitled to overtime pay.

An appellate panel in California determined that Wedbush Securities financial advisors paid solely on a commission basis do not meet the requirements under California labor laws to be exempt from overtime pay, overturning a trial court’s decision on the matter.

The appeal arose from a class action that was filed by lead plaintiff, Joseph S., on behalf of himself and 105 other current and former Wedbush Securities financial advisors who argued that they were owed overtime pay.

The financial advisors had been classified by the securities broker-dealer firm as exempt from receiving overtime pay under California’s administrative exemption. Following a bifurcated bench trial last year, the lower courts ruled in favor of the securities firm. Subsequently, Joseph appealed to the Fourth Appellate District in May 2019.

Finding that the commission-based compensation model used by Wedbush Securities did not pay its financial advisors a salary, the appellate panel determined that they could be paid overtime.

What Was the Compensation Model Allegedly Used by Wedbush Securities?

According to the suit, Wedbush Securities paid its financial advisors solely on commission, arguing that the compensation model was effectively the equivalent of a salary. Although the lower court granted class certification, it agreed with the firm and ruled that the commission-based compensation model exempted the financial advisors from overtime.

In its compensation model for its financial advisors, Wedbush Securities allegedly used a computer system to calculate compensation and would pay commission based on the compensation tier met in a particular month. The percentage of commission would be applied in accordance with the advisor’s total monthly sales.

In order to qualify for the overtime exemption in California, Wedbush Securities purportedly paid its financial advisors an advance of future commissions earnings to ensure that they would earn at least double the California minimum wage, per the law’s requirement for the administrative exemption. The advisors were required to repay the advance, which was carried as a deficit each month until it was repaid.

Disagreeing with the lower court, the appellate panel found that Wedbush Securities’ commission-based compensation plan for its financial advisors did not satisfy the “salary basis test” for the purposes of an administrative exemption.

The appellate panel stated in its opinion, “An advance is not a wage. Wedbush therefore cannot rely on its advances to satisfy the salary basis test. The salary basis test requires employers to pay their employees at least double the minimum wage, not loan them that amount. Since Wedbush recoups the advances from future commissions, it does not pay wages (much less a salary) equivalent to twice the minimum wage.”

Wedbush Securities advisors are entitled to overtime pay.What Was the Administrative Exemption Used by Wedbush Securities?

Under California law, employers are usually required to pay overtime to employees who work more than eight hours a day or forty hours in a workweek.

However, the law also recognizes a number of exemptions from overtime for certain workers and professions. Wedbush Securities relied on the administrative exemption in Wage Order 4, which applies when an employee earns “a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment.”

Although the parties both agreed that the employment duties would be exempt under the regulation, the dispute in the case concerned whether the commission-based compensation model satisfied the salary basis test.

As indicated in the appellate panel’s decision, the California regulations don’t define “salary” or delineate what would constitute paying an employee on a “salary basis” — the appellate court looked to the federal regulations of the Fair Labor Standards Act for guidance in its analysis.

Under the federal regulations, only up to ten percent of an employee’s salary may be comprised of commissions. “Since ‘California follows the federal salary basis test to a substantial degree’, a commissions-only compensation plan cannot pass California’s salary basis test,” the appellate panel determined, determining that Wedbush Securities’ compensation plan did not satisfy the salary basis test to qualify for the administrative exemption.

The Wedbush Securities Overtime Pay Lawsuit is Case No. G057740, in the Court of Appeal of the State of California, Fourth Appellate District.

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