Commission-based pay arrangements are common in sales jobs, but there is often confusion about overtime pay for these employees. Many people assume that if you earn a commission, you might not be entitled to overtime. In reality, the Fair Labor Standards Act (FLSA) requires overtime pay for most employees — including those earning commissions — unless they meet a specific exemption based on both their job duties and the nature of their industry. This article explores how commission overtime pay works under the law, the differences between inside sales overtime eligibility and the outside sales exemption, and what commission-based wage law rules mean for workers and employers.
If you’re struggling with commission pay and overtime disputes as a sales employee, it’s time to take action. The Lore Law Firm can work to ensure you get what you deserve. Contact us for guidance on your case or call us at (866) 559-0400 to confidentially discuss your situation today. Let’s work together to secure your financial future.
Commission-Based Pay and Overtime: What Does the Law Say?
Under the FLSA, non-exempt employees must receive overtime pay at 1.5 times their regular rate of pay for all hours worked over 40 in a week, and that regular rate must include any earned commissions. Being paid by commission does not automatically exempt an employee from overtime requirements. In fact, federal regulations make it clear that commissions are considered part of an employee’s earnings for hours worked and must be included in the regular rate when calculating overtime pay.
Commission-based wage law ensures that employers cannot sidestep minimum wage or overtime obligations by simply paying a worker through commissions. Unless an overtime exemption applies, a commissioned employee should receive at least the federal minimum wage for all hours worked and overtime pay for hours beyond 40 per week. The default rule is that commission-paid employees are entitled to overtime pay just like hourly workers, provided they don’t fall under an exemption.
How overtime is computed for commission-paid employees differs from a standard hourly calculation. If you receive commissions (either in addition to a salary or as your sole compensation), those commissions are allocated to your pay period and increase your effective regular rate of pay. Overtime pay must then be paid at one-and-a-half times that higher regular rate. For example, if you earned a large commission during a week where you worked overtime, your employer must factor that commission into your weekly pay when determining the overtime premium owed.
Inside Sales Employees and Overtime
Inside salespeople are generally those who sell products or services from their employer’s place of business (or from their home office) rather than by going out into the field. They often make sales over the phone, via email, or through online meetings. Under federal law, most inside sales employees are considered non-exempt, meaning they should be paid overtime (time-and-a-half) for hours worked over 40 in a week. The U.S. Department of Labor’s regulations explicitly do not provide a blanket overtime exemption for inside sales staff.
Inside sales employees who are misclassified as exempt may be owed back pay. If an employer wrongly treated an inside salesperson as overtime-exempt and failed to pay required overtime, that employer can be liable for the unpaid overtime going back two to three years. Misclassification in this context is common – for instance, a company might pay a salesperson commission and assume no overtime is due, when in fact the law says otherwise.
Is there any overtime exemption for inside sales roles? Yes – there is a specific, narrowly tailored exception often called the retail or service establishment exemption. Under FLSA Section 7(i), an employer in a retail or service industry can exempt an employee from overtime only if all three of the following conditions are satisfied:
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Retail/Service Employer: The employee works for a retail or service establishment (typically an employer whose business is selling goods or services to the general public, and 75% of whose sales are not for resale). Examples might include retail stores, dealerships, or service providers directly serving consumers.
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Earnings Threshold: The employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage in their state — for instance, in Colorado’s 2025 rate of $14.42/hour, the threshold would be at least $21.63/hour.
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Commission Majority: More than half of the employee’s total earnings in a representative period (at least one month, up to one year) must come from commissions on goods or services. This means the job is truly commission-driven.
Unless all three of the above criteria are met, an inside sales employee must be paid overtime for hours over 40. This Section 7(i) exemption is fairly narrow. It commonly applies to certain retail sales positions – for instance, a furniture salesperson on the showroom floor might be exempt from overtime if their pay is mostly commission and their hourly earnings are high enough. But many inside sales roles won’t meet these strict conditions.
State Law Nuances: In addition to federal law, some states have their own rules for commissioned inside sales employees. California, for instance, allows an overtime exemption for inside salespeople in certain industries that largely mirrors the FLSA 7(i) criteria. However, many states do not have any special inside sales overtime exemption, meaning they follow the federal rule: inside sales are generally non-exempt.
Outside Sales Employees and the Overtime Exemption
Unlike inside sales staff, outside sales employees are typically exempt from overtime under the FLSA — and Colorado follows the same standard without adding any state-specific exceptions. The FLSA’s Section 13(a)(1) includes an exemption for “bona fide outside sales employees,” meaning these workers are not entitled to overtime pay if they meet the legal test. The law defines it by two key criteria:
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Primary Duty of Sales: The employee’s primary duty must be making sales or obtaining contracts/orders for services or for the use of facilities. “Making sales” is defined broadly to include any sale, exchange, contract to sell, or other disposition of tangible or intangible property. In essence, the person’s main role is persuading customers to purchase something or sign a contract.
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Customarily Engaged Away from Employer’s Place of Business: The employee must regularly work outside of the employer’s place of business – meaning they are customarily and regularly out in the field, at customer locations, or otherwise away from any fixed site of the company. This includes going to customers’ homes or offices, traveling to meet clients, door-to-door sales, etc. Sales made by telephone, email, or internet from an office or home base do not count as outside sales activities.
If, and only if, both of the above conditions are met, an employee can be classified as an outside sales exempt employee who is not owed overtime. Unlike most other white-collar exemptions, the outside sales exemption has no minimum salary requirement. An outside salesperson could be paid entirely on commission with no base salary at all, and still be exempt from overtime – as long as they truly meet the duties test.
It’s important to understand what “customarily and regularly away from the place of business” means in practice. It signifies that the employee routinely works outside the office – not just on one or two occasional trips. A traveling pharmaceutical sales representative or field sales consultant who spends most days visiting client sites would qualify. But a salesperson who ordinarily works from headquarters and is sent out to a trade show once a quarter is not “customarily and regularly” away. The U.S. Department of Labor notes that any fixed site used as a sales headquarters – even a home office – is considered an employer’s place of business. So, working from home doing telesales is treated as inside sales, not outside sales.
Bottom line: If you are truly an outside sales employee – spending your workdays on the road, meeting clients at their locations, and directly generating sales – your employer is generally not required to pay you overtime under federal law. However, if you do most of your selling by phone or at your desk, then you are not exempt and must receive overtime pay for over-40 hours.
Misclassification Issues: Common Pitfalls
Misclassification of employees in sales positions is a frequent source of wage disputes. Some employers try to get around overtime requirements by classifying inside salespeople as outside sales or as independent contractors. Neither title nor pay method alone determines your legal rights – it’s the actual work duties and how/where you perform them that matter. Here are common issues:
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Labeling Inside Sales as Outside Sales: An employer might call an inside salesperson an “outside sales rep” and pay only commissions with no overtime. However, sporadic client visits won’t qualify if the role fundamentally involves inside work. If you primarily work from a fixed location (office or home) using phone/email to communicate with customers, you should likely be classified as non-exempt and receive overtime.
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Commission-Only Pay with No Overtime: Many employers wrongly think that paying solely by commission means overtime law doesn’t apply. Unless an exemption like outside sales or the 7(i) retail exemption applies, commission-only employees are still entitled to overtime pay.
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Independent Contractor Misclassification: Another tactic is classifying a salesperson as an independent contractor instead of an employee. If the company controls most aspects of your work (schedule, duties, pricing, etc.), you are likely an employee even if they pay you via 1099 forms. Many commissioned salespeople are improperly given contractor status in an attempt to deny them overtime and benefits.
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Highly-Paid Salespeople: There’s a misconception that high earners aren’t eligible for overtime. This is false. The FLSA does not have an earnings cutoff above which overtime doesn’t apply. There have been cases where very well-paid commission sales employees (earning six figures) won overtime claims because they didn’t meet any exemption criteria.
Protecting Your Rights: If you suspect misclassification, it’s important to speak up and seek legal advice. The law protects employees from retaliation for raising overtime pay concerns. Given the complexity of wage and hour regulations, consulting with an experienced wage and hour lawyer is often the best way to understand your position. Time limits apply — under the FLSA you can usually recover up to two years of unpaid overtime (three for willful violations), though some states, including Colorado, may allow longer recovery under state wage laws.
Frequently Asked Questions (FAQ)
Q: Are commission-based employees entitled to overtime pay?
A: Yes, in many cases. Being paid by commission does not automatically exempt you from overtime laws. The default rule is that non-exempt employees must receive overtime pay for hours worked over 40 in a week, regardless of whether their earnings come from commissions, hourly wages, or a salary. Commission-based employees are entitled to overtime unless they fall under a specific exemption.
Q: What is the outside sales exemption?
A: The outside sales exemption excuses employers from paying overtime to employees who work as outside salespersons, provided (1) your primary duty is making sales or obtaining orders/contracts, and (2) you are customarily and regularly working away from your employer’s place of business. If you spend most of your time at the office or working remotely using phone or email, then you likely do not meet the outside sales criteria.
Q: Do inside sales representatives get overtime pay?
A: Usually, yes. Inside sales representatives are generally entitled to overtime pay under the FLSA. The only exception is the narrow retail or service exemption under Section 7(i), which applies only if (1) the employer qualifies as a retail or service establishment, (2) the employee’s regular rate exceeds 1.5 times the applicable minimum wage, and (3) more than half of the employee’s earnings come from commissions.
Q: How is overtime calculated if I earn commissions?
A: First, determine your regular rate of pay for the week by dividing all earnings (including commissions) by total hours worked. Commissions must be included in the regular rate. Once you have the regular rate, overtime is paid at 1.5 times that rate for each hour over 40. The key takeaway is that commission pay cannot be excluded from overtime calculations.
Q: What should I do if I suspect I’m misclassified?
A: Keep detailed records of your hours and pay. You can consult a wage and hour attorney or file a complaint with the U.S. Department of Labor’s Wage and Hour Division, and in some states (like Colorado) with the state labor department. Don’t delay — the FLSA allows recovery for up to two years of unpaid overtime (three for willful violations), and state laws may offer additional remedies.
Conclusion
When it comes to commission-paid employees and overtime, the rules hinge on the nature of the sales role. Inside sales personnel are generally entitled to overtime pay, unless strict conditions are met for a retail commission-based exemption. Outside sales personnel, meeting the legal test, don’t get overtime – but that category is narrower than many think, especially in today’s digital sales environment. Understanding these distinctions can help employees know when they’re owed overtime and help employers avoid costly misclassification mistakes. If you believe your employer has wrongly withheld overtime pay, consult with a wage and hour attorney to evaluate your situation and determine if you’re owed compensation.
If you’re struggling with commission pay and overtime disputes as a sales employee, it’s time to take action. The Lore Law Firm can work to ensure you get what you deserve. Contact us for guidance on your case or call us at (866) 559-0400 to discuss your situation today. Let’s work together to secure your financial future.
Michael Lore
Founding Attorney
Michael Lore is the founder of The Lore Law Firm with over 25 years of experience in labor and employment law. He handles cases ranging from unpaid overtime and class actions to executive contracts and personal injury matters in courts nationwide.
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