Companies often seek to limit their risks in business, as well as limit their overall payroll expenditures. What simpler way to limit payroll risks than by implementing an “eat what you kill” compensation system that provides an employee the opportunity to work on a pure commission basis? However, employers should beware of violating the Fair Labor Standards Act (FLSA) and state wage hour laws as there are very real and potentially expensive consequences.
Generally, the FLSA requires employers to pay an overtime premium to employees of one and a half times the employee’s regular rate of pay for all hours worked in excess of 40 within a workweek and to also pay at least the minimum wage for all hours worked. However, there are certain exceptions to these requirements under the FLSA. One particular area of confusion is when an employee is a commission paid employee as the FLSA has carved out several exceptions.
• White Collar Exemption:
The “White Collar” exemption generally includes executives, administrators, and professionals. In order to qualify for this exemption, certain thresholds need to be met. First, the employee must be paid a salary of at least $455 per week (this is expected to substantially increase with new federal regulations that are anticipated to become effective in 2016). Once the salary level test is met, the employee must satisfy the duties test for their respective position. For example, a salesperson advising a client on the proper product to purchase might be an administrative employee. A sales manager, paid by commission, who supervises two or more employees, might qualify under the executive exception. Lastly, a lawyer who is paid a percentage of the fees that he collects likely falls under the professional employee exemption.
Regardless of the position, an employee must receive a salary, or guaranteed draw, of at least the required weekly amount. Therefore, a pure commission paid employee cannot be exempt under the “White Collar” exemption within the FLSA.
• Outside Sales Exemption
In order to qualify for this exemption, the employee’s primary duty must be the sale of goods or services or the rental of facilities and the employee must be customarily and regularly engaged away from the employer’s place of business. The second prong of this inquiry is where most commission paid employees are disqualified. For example, a general salesperson that maintains an office at the company’s facility, but is required or expected to meet with customers, generally does not fit under the outside sales exemption and would be protected by the minimum wage and overtime provisions of the FLSA. Conversely, if an employee is an outside salesperson, the company does not have to pay him/her a salary or minimum wage.
• Employees Paid Commissions by Retail Establishments
This exemption requires that the employee must be employed by a retail or service establishment, defined as establishments 75 percent of whose annual dollar volume of sales of goods or services (or of both) is not for resale and is recognized as retail sales or services in the particular industry. An employee at a retail establishment requires the employer to demonstrate the employee’s regular rate of pay exceeds one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked. Further, the employer must show that more than half the employee’s total earnings in a representative period (at least one month and no more than one year) must consist of commissions. Once these requirements are met, the employer may compensate the employee on pure commission without overtime premiums.
While the FLSA has many exceptions and requirements, states generally have wage hour laws that are more restrictive than the FLSA. The various requirements pose challenges to employers as they can face immense liability for violating the FLSA or state laws. Therefore, it is imperative for employers, and employees, to verify the company is satisfying the FLSA’s and state’s minimum wage and overtime requirements for commission paid employees.
Source: Bennett L. Epstein, Do You Need to Pay Minimum Wage or Overtime to Your Commission-Paid Employees? (September 21, 2015), http://www.natlawreview.com/article/do-you-need-to-pay-minimum-wage-or-overtime-to-your-commission-paid-employees.