When compensating commissioned employees, employers should be careful to adhere to wage and hour laws regarding overtime and holiday pay.
Many employers make the mistake of failing to compensate commissioned employees correctly. Despite the misperception that commissioned employees are exempt from state and federal overtime requirements, very few commissioned employees are exempt from state and federal overtime requirements.
Federal law, set forth in the Fair Labor Standards Act (FLSA), establishes a minimum regulatory floor, rather than a ceiling, with respect to wage and hour law. However, commonly state law provides additional, more generous rights to employees. Where the state law provides for any additional, more employee-friendly requirements, employers are required to comply with state law.
It is critical to determine whether commissioned employees are exempt or nonexempt.
Most employees must be classified as non-exempt. To ensure proper classification, employers should begin with the assumption their commissioned employees are non-exempt, and review the potential exemptions to determine whether they apply. The most common exemptions are the executive, administrative and professional exemptions.
According to the FLSA, if an exemption does not apply, most employees are required to be paid at least the federal minimum wage for all hours worked and overtime pay at the rate of time and one-half the regular rate of pay for all hours worked in excess of forty hours in a workweek. An employee's compensation must generally equal or exceed the minimum wage for each hour worked, unless the employee qualifies for an exemption under the Fair Labor Standards Act (FLSA).
Where commissioned employees are entitled to overtime, the last step is to apply the correct overtime calculation.
If employees do not qualify for an overtime exemption, they are entitled to overtime whenever they work more than 40 hours in a workweek. Commissions must be included when determining the employee's regular rate of pay.
To determine the regular rate of pay for a commissioned employee who is also paid a guaranteed hourly rate, add the total compensation (guaranteed wage plus commissions earned) and divide by the total hours for the week. However, the calculation can be more complicated if the employee is paid a salary.
Below are example formulas for how to calculate overtime pay for commission employees:
Commissions + Hourly Rate of Pay
Regular rate = $1,500/50 hours = $30/hour
Total compensation formula = earnings from hourly wages and commissions + (10 hours @ one-half the regular rate of pay)
Employee’s total pay = $1,500 + (10 hours x .5 x $30/hour) = $1,650
2. Commissions + Salary, where the employee’s salary is intended to cover 40 hours of work
Regular rate = $1,500/40 hours = $37.50/hour
Total compensation formula = base salary and commissions + (10 hours @ time and one-half the regular rate of pay)
Employee’s total pay = $1,500 + (10 hours x 1.5 x $37.50/hour) = $2,062.50