A wide variety of employees in different industries earn commission pay as an incentive to sell more products and services. However, the payment of commissions to employees can raise a number of difficult legal issues for a company, including whether employees are entitled to overtime pay and, if so, how much.
Employees engaged in sales who work on the road or from home are generally exempt from overtime under state and federal law. Often called “outside salespersons,” these employees traditionally earn commissions based on sales in their region or territory. There are some outside salespersons who work exclusively on commissions and others who also get a base salary. Depending on the circumstances, a company might misclassify employees as exempt salespersons by paying them commissions rather than overtime, when the employees should be entitled to both. This issue has been the subject of many lawsuits, including a recent Supreme Court decision ruling that pharmaceutical sales representatives who earned commissions from sales of prescription drugs were properly exempt from overtime even though they did not directly sell drugs to doctors or patients. The simple fact that the pharmaceutical representatives earned commissions was not the only basis for the Supreme Court’s decision. There are still other situations where “sales” employees may be entitled to overtime, particularly situations where the employee is engaged in “detail” or “promotional” work supporting the sales of goods or services in retail stores rather than making direct sales to customers.
Employees working within retail stores or service centers who earn commissions can also be exempt from overtime. These “inside sales” employees are only exempt from overtime if they meet two criteria. First, the employee must earn more than $10.88 an hour for every hour worked, which is one-and-a-half times the current U.S. minimum wage. Second, at least half of their pay in a given pay period must come from the commissions they earned in that pay period. Although this overtime exemption is commonly used by companies in the retail industry, it can affect jobs ranging from exotic dancers to auto mechanics. In fact, a group of auto mechanics and technicians won a significant court ruling against nationwide retail chain Pep Boys because Pep Boys’ “flat-rate” payments to the employees were not proper “commissions” that would exempt those employees from overtime.
Calculating Overtime With Commission Pay
If, as in the Pep Boys case, the employee is not properly exempt as an outside or inside salesperson, the employee’s commissions must be calculated into their overtime pay rate, increasing the employee’s overall compensation. For example, an employee who earns $20 an hour without commissions is entitled to overtime pay at the rate of $30 per hour. However, if that employee also earns commissions, the overtime rate will actually be higher than $30 an hour. This is another potential mistake employers make when paying employees, particularly when commissions are only paid once every month or quarter. In those instances, the employer will owe backpay for each overtime hour worked during the pay periods in which the commissions were actually earned. Employers who do not follow this rule can be liable for the difference in overtime pay owed to the employee as well as an equal amount as “liquidated damages.”
Simply because an employee earns commissions does not automatically make them exempt from overtime pay, and if they are entitled to overtime pay, their commissions will increase the overtime rates at which they must be paid. Also keep in mind that certain states, such as New York, Illinois, California, and Washington, have stricter overtime laws which provide more favorable protections to employees. Therefore, it is important to know the laws of the state in which you work.