Overtime pay for employees who earn commissions is an area in which many employers run afoul of the Fair Labor Standards Act (FLSA). Although some commissioned employees are not entitled to overtime under the FLSA, they must meet strict regulatory guidelines to be exempt. Many workers are unaware of these rules and may falsely assume that they have no right to overtime. If you’re an employee who is paid a commission and you want to know whether you qualify for overtime, The Lore Law Firm is here to guide you.
The Basics of Overtime and Commissions
Before determining whether you can seek overtime pay as a commissioned employee, it’s important to know the basics of both overtime pay and commissions.
Under the FLSA, employers must generally pay their employees overtime (at the rate of 1.5 times their regular hourly rate, also known as time and a half) for any number of hours worked above 40 during a week. If, for example, an employee works 45 hours in a week, 40 of those hours are paid at the regular hourly rate while 5 of those hours are considered “overtime hours” and must be paid at 1.5 times the regular rate.
There are exemptions to this rule, one of which – provided certain criteria are met – is commissioned sales work. However, employers who violate the FLSA can be ordered to pay back wages and other compensation to affected workers.
Although most workers are hourly or salaried, some get paid a commission for their work. Commissions are common in such industries as retail, sales, service, finance and insurance. They are often paid as rewards for exceptional work, such as exceeding sales quotas or meeting other goals.
Employees can be paid on a straight commission or they can receive a combination of regular wages (such as hourly pay) and commission. However, employers must pay their commissioned employees overtime unless an exemption applies.
When Commissioned Employees Are Exempt from Overtime
Commissioned employees are paid either a percentage of sales or a flat rate, regardless of the number of hours they work during a week. However, that does not necessarily mean the employee has no right to overtime. If you earn a commission, you are entitled to overtime unless your employer can claim an exemption under the FLSA.
To be exempt, a commissioned employee must meet the following requirements:
- The employee must work for a retail or service establishment
- The employee’s regular rate of pay must exceed 1.5 times the federal minimum wage (currently $7.25) for every hour worked in a workweek in which overtime hours are worked
- More than half of the employee’s total compensation during a representative period (which cannot exceed one year) must come from commissions
Example of a Commissioned Employee Who is Exempt
With the above standards in mind, consider an employee who is paid a weekly commission of $1800. During the week, the employee works 50 hours. First, divide the $1800 by 50 hours. Whatever this value is must exceed 1.5 times the federal minimum wage rate of $7.25 per hour ($7.25 x 1.5 = $10.88/hour).
$1800/50 hour = $36/hour
Because the $36 per hour exceeds $10.88 per hour, this employee would be exempt from overtime pay.
What If the Employee Is Paid Regular Wages and Commissions?
Some employees are paid a combination of regular wages and commissions. The calculation becomes a little more complicated but is nonetheless essential to determining whether the employee is owed overtime.
The first step is to total the employee’s earnings (regular wages and commissions) during the week. Consider this example:
An employee is paid $15/hour and earns a weekly commission of $100. During the week, the employee works 50 hours. 50 x $15/hour = $750, and adding the $100 ends up with $850 in total earnings for the employee during the week.
Next, divide this total amount by the hours worked during the week to determine the employee’s regular rate of pay. In this case it would be $850/50 = $17/hour.
While the employee’s regular rate of pay for the week is more that 1.5 times minimum wage, they did not earn more than half of their total compensation from commissions. If this has been the norm, the employee would not be exempt and her hours worked above 40 during a workweek must be paid at the rate of time and a half. The employee’s pay should look like this:
$17/hour x 40 = $680 regular pay
$17/hour x 1.5 x 10 = $255 overtime pay
Total pay earned = $935
Are Outside Sales Employees Exempt?
A closely related question concerns employees who are engaged in outside sales. These workers are exempt from overtime pay if they meet the following:
- The employee’s primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
- The employee must be customarily and regularly engaged away from the employer’s place(s) of business
As defined by the FLSA, “sales” includes any sale, exchange, contract to sell, consignment for sales, shipment for sale, or other disposition. It also includes the transfer of title to tangible property, and in certain cases, of tangible and valuable evidence of intangible property.
Note that some outside sales employees became non-exempt inside sales employees while working from home during the pandemic lockdown. Once working from home and no longer making “outside” sales meetings, such workers no longer meet the requirements for the outside sales exemption and may therefore be entitled to overtime pay for the time period in which they worked primarily from home.
Are You Being Paid the Overtime You Deserve?
If you’re a commissioned employee and want to know about your right to overtime, reach out to The Lore Law Firm. We stand up for workers across the country who are not being paid the wages and overtime they deserve. You can get started today by filling out our free and confidential client intake form.