Don’t Get In Trouble Paying Commission Based Employees

Many business owners are aware of their obligation under the Fair Labor Standards Act (FLSA) to pay workers overtime, for any hours they work that exceed 40 hours per week—and of course, of the obligation to pay at least minimum wage for hours worked less than 40 hours per week.

But the reality is that not all employees are neatly paid a set hourly wage by the hour. Many workers have different salary structures—particularly, commission based workers.

Commission based workers may get irregular salary, salary that is not based on the hours worked, and can, in some weeks, greatly exceed minimum wage, but in other weeks, may fall far below it.

Exemptions in Some Situations

The good news is that as a general rule, commissioned employees are exempt from the FLSA, meaning you as an employer don’t have to worry about what they make hourly, or about violating the FLSA. But that’s only if employees meet certain requirements.

To be exempt, a commissioned employee must make more than 1.5 times the federal minimum wage (which currently would be $10.88 hourly). This is calculated simply by taking what the employee earns, and dividing it by the hours worked.  If the calculation of the hourly wage is more than the $10.88, there are no FLSA issues involved.

To be exempt the employee must be commissioned for more than half of his or her pay. That means that employees that make one time commissions, or sporadic commissions, but who are primarily hourly, are not exempt.

In other words: you can’t give an employee paid hourly a commission every now and again, just to avoid complying with the FLSA.

Retail or Service

There is yet another requirement that has to be met in order to be exempt from the FLSA. The worker must be in an industry or field that is considered to be “a retail or service establishment.”

Unfortunately, there is no one, common, accepted definition of what this actually means. The Department of Labor has said that it means any industry that services the everyday needs of the community.

This is hardly a helpful definition. It may, however, mean that commissions for transactions that are business to business transactions, may not qualify. The word “retail” may suggest products sold only to consumers, or end-users.

You will also note that the word “establishment” is in the definition. This would seem to exclude online transactions that generate commissions, to the extent that online businesses aren’t “establishments,” but again, as of now, the Department of Labor has not defined this fully.  

Outside Salespersons

There is also an exception for outside salespersons. If an employee works mostly out of the office, generating commission based sales, and that is the employee’s primary job, the employee is likely exempt from the FLSA, regardless of any of the other requirements.

Make sure your business is compliant with the FLSA. Call the West Palm Beach business litigation lawyers at Pike & Lustig today.

Sources:

nolo.com/legal-encyclopedia/getting-paid-commission-california.html#:~:text=Fair%20Labor%20Standards%20Act%20and%20Commission%20Payments&text=That%20means%20employees%20must%20be,an%20employee’s%20overtime%20pay%20rate.

dol.gov/general/topic/wages/commissions