commissions - Horton Management Law

The Fair Labor Standards Act requires employers to pay non-exempt employees overtime if they work enough hours (usually over 40/week). Overtime must be paid at one-and-a-half times the employee’s “regular rate” of pay. Unfortunately, it’s not always so easy to calculate the employee’s regular rate.

Here we’ll look at some of the most common regular rate calculation issues. This article focuses on the federal FLSA. State overtime requirements often borrow the same overtime calculation rules, but state requirements may vary.

Defining the “Regular Rate” of Pay

The FLSA’s statutory definition of “regular rate” is almost as long as this blog post. The first few words define “regular rate” to include “all remuneration paid” to the employee. However, the next several hundred words identify exclusions.

More briefly stated than in the statute itself, these exclusions include certain:

sums paid as gifts;
payments made for occasional periods when no work is performed;
reimbursements for traveling expenses;
discretionary bonuses;
profit sharing;
payments made for employee benefits;
additional compensation for hours worked beyond a specified number in a day/week or outside the normal workday/week;
premium compensation for work on weekends or holidays; and
income derived from qualifying stock transactions.

Many of the items below are more nuanced than described here. So, don’t automatically exclude a payment just because it looks like it might fit on this list.

Significantly, the “regular rate” is an hourly rate. It’s always an hourly rate, even for employees who aren’t paid hourly. Many non-hourly employees are exempt, so it’s not necessary to calculate their regular rate. But some salaried employees are eligible for overtime. And some hourly employees also receive compensation beyond their base pay that counts toward their regular rate for overtime purpose.

When the Regular Rate Differs from the Base Hourly Rate

If a non-exempt employee receives any compensation other than their base hourly rate, the employer must consider what else to include in the regular rate when calculating overtime.

The regular hourly rate of pay of an employee is determined by dividing their total remuneration for employment (except statutory exclusions) in any workweek by the total number of hours actually worked in that workweek.

Let’s look at how this work in several common situations.

Salaried Employees

If an employee’s only form of compensation is a fixed salary per week, then you compute the regular rate by dividing the salary by the number of hours that the employer reasonably intends the salary to compensate. So, if the employee is paid $800 per week to work 40 hours, the regular rate is $20 per hour. If that employee works 50 hours in a given week, then they would need to receive total pay of $1100 [$800 base salary for the first 40 hours and $300 ($20 x 1.5 x 10 hours) for the overtime].

Hourly Wage Plus Commissions

Some hourly employees are eligible to receive commissions or incentive bonuses based on a percentage of sales or another fixed formula. This additional compensation factors into the employee’s regular rate for overtime calculations.

The calculation may be relatively straightforward where commissions are paid weekly. Then you just divide the commissions for the week by the number of hours worked in the week and add it to the base hourly rate earned in the week to determine the overtime regular rate. Take for example a non-exempt employee who works 45 hours with a $10/hour base rate. The employee also earns $90 in commissions in a given week. Their regular rate in that workweek is $12 [the $10 base rate plus $2 ($90 in commissions / 45 hours worked)]. Their total compensation for the week, including overtime, must be $570 [$480 ($12 x 40 hours regular time pay, including commissions) + $90 (5 overtime hours x $12 regular rate, including commissions x 1.5)].

If, however, commissions are not earned and paid weekly, the calculation becomes more complicated. If the amount of commissions earned cannot be determined until after the regular pay day for the workweek in which the employee performed the work that results in the commissions, then the commissions don’t have to be included in the regular rate and paid as overtime on that payday. But, once determined, the commissions will eventually affect the regular rate, and may require additional overtime calculations and payments. The U.S. Department of Labor has specific rules for calculating the regular rate and allocating the commissions over earlier workweeks in order to fully compensate the employee for overtime earned.

Employees Working at Two or More Rates

Sometimes employees receive different rates of pay depending on what jobs or tasks they perform. By default, the regular rate is then determined by taking the weighted average of the separate rates earned. This means that the regular rate of an employee who spends 30 hours working for $15 and 20 hours working for $10 would be $13 per hour ($450 + $200 / 50). So the employee’s total compensation would be $715 [$450 + $200 + $65 (the half-time portion of the 10 overtime hours, since the regular time portion is already included here)].

An employer may, however, have the option of instead paying overtime calculated at 1.5 times the rate for the specific work performed during the overtime hours. Using the previous example, if the employee had worked all of the overtime in the job that pays $10 per hour base, then the regular rate for the overtime could be just the $10, rather than the weighted average wage. But the employee would have to apply this approach consistently, such that if the employee’s overtime (i.e., the last hours worked in the week beyond 40) were in the higher paying job, then the regular rate would be $15 rather than $10. For the employer to use this approach, the employee must know of and be willing to work under this overtime structure before beginning the work.

The second method might be disallowed if an employer uses it to systematically reduce an employee’s overtime pay. This might be case where the employer always requires the employee to perform the lower-rate work at the end of the week. Then the employer may need to revert to the weighted average method.

Many More Regular Rate Scenarios Exist

These are just some of the most common methods for determining regular rate of pay for FLSA overtime purposes. The U.S. Department of Labor has permitted various other exceptions and approaches, either based on direct statutory instructions or as enforcement practicalities. Employers facing non-routine overtime issues should confer with experienced legal counsel. Mistakes in overtime calculations can lead to significant underpayment liability for employers, including liquidated damages and potentially attorneys’ fees.

New York’s Labor Law requires employers to have written agreements with each commissioned salesperson they employ. Employers who don’t satisfy this requirement could run into serious problems down the road.

Who Is a Commissioned Salesperson?

The New York Labor Law uses the terms “commission salesman,” “commission salesperson,” and “commissioned salesperson” interchangeably. I think the last one sounds best, so I use it here.

The law defines the terms to mean “any employee whose principal activity is the selling of any goods, wares, merchandise, services, real estate, securities, insurance or any article or thing and whose earnings are based in whole or in part on commissions.”

But it specifically excludes employees “whose principal activity is of a supervisory, managerial, executive or administrative nature.”

The New York Labor Law also establishes alternative requirements (not discussed here) for “sales representatives” who are independent contractors rather than employees.

Required Agreements

Employers must have a written agreement with each commissioned salesperson that addresses their compensation. Both the employer and the commissioned salesperson must sign the agreement. The employer must retain a copy of the agreement for at least three years.

The agreement must include:

a description of how to calculate wages, salary, drawing account, commissions, and all other money earned and payable;
the frequency of reconciliation for any recoverable draw; and
details about payment of compensation earned and payable upon termination of employment by either party.

It is the employer’s burden to ensure that the necessary document is in place. Otherwise, whatever terms the commissioned salesperson says exist will likely become binding.

Payment Frequency

Employers must pay each commissioned salesperson according to the agreed terms of employment.

Generally, this must be at least once per month and by the last day of the month following the month in which the employee earned the compensation. However, if monthly or more frequent payment of wages, salary, drawing accounts, or commissions are substantial, then the employer may pay additional compensation less frequently than once in each month. The employer must always pay at least as soon as required under the compensation agreement.

Upon written request of a commissioned salesperson, an employer must provide a statement of earnings paid or due and unpaid.

Make Sure You Have Agreements in Place with Each Commissioned Salesperson

Ideally, employers should satisfy these requirements at the time of hire. But you may have employees who change into qualifying roles after they start. Or you might not have put everything in writing. Now is a good time to review your records to make sure you have what you need if there is ever a dispute with a commissioned salesperson over compensation.

Businesses should also periodically review their commissioned salesperson agreements. Do they still reflect the current compensation terms? If not, prepare a new agreement, and get the employee to sign it.

Don’t forget to make sure you’re also complying with the New York Wage Notice Requirements!

Tag: commissions

Calculating the Overtime “Regular Rate”