The “Commissioned Employee” May Be Entitled to Overtime Wages

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I have seen that some employers believe that they can pay their employees on a “commission basis” and do not need to pay overtime compensation for hours worked over forty (40) per week. However, this may be a violation of Federal law as well as state law.

Specifically, under the Fair Labor Standards Act of 1938 (the “FLSA”), which is the federal law that governs wages and hours, all non-exempt employees are required to be paid $7.25 for every hour that they work, and $10.88 for every hour that they work over 40 hours per week. Non-exempt employees in Florida are entitled to receive $8.56 per hour and $12.84 per hour for all hours worked over 40 per week. In general, most production or service employees are non-exempt unless a specific exemption applies to them.

Generally, non-exempt employees can be paid hourly, salary, piece rate, commission, etc., as long as their weekly compensation equals at least the minimum wage for all of the hours worked and overtime is paid for hours in excess of 40 in a workweek. With respect to paying employees on a “commission” basis, there are generally two exemptions pursuant to which employees can be paid on a commission basis - one which is called the “retail or service establishment” exemption pursuant to which retail establishments may pay their employees on a “commission basis” provided certain conditions are met, and the other is the “outside salesperson” exemption.

The “Retail or Service Establishment” Exemption

Under Section 7(i) of the FLSA, a “retail or service establishment” is defined as an establishment in which 75% of its annual dollar volume of sales of goods or services (or both) is not for resale and is recognized as retail sales or services in the particular industry.

In order to use the commission exemption, the retail establishment must meet the following three conditions:

  1. The employee must be employed by a retail or service establishment, and
  2. The employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked, and
  3. More than half the employee’s total earnings in a representative period must consist of commissions.

The typical problems include the fact that most employers that pay on a “commission basis” do not maintain an accurate record of the hours worked by the employees. However, in order to take advantage of the Section 7(i) “retail exemption,” the employer must maintain accurate records of hours worked each workday, hours worked during each workweek, and earnings and wages paid. Without maintaining this information, the employer cannot claim the exemption under the FLSA.

Therefore, if the employee that is paid on a “commission basis” works over 70 hours per week and the employer fails to maintain accurate records of the hours work and, as such, is unable to meet the test set forth above, then the employee may be entitled to overtime compensation for all hours worked over 40 during each workweek.

The “Outside Salesperson” Exemption

Under 29 C.F.R. §541.500, of the FLSA regulations, an outside sales employee is exempt from the minimum wage and overtime pay provisions of the FLSA if the employee’s primary duty is making sales or soliciting orders or contracts for services, and the employee customarily and regularly works away or outside of the employer’s place of business. This means that the employee must work in sales outside of the office or the employer’s establishment. Importantly, the regulations provide that an employee whose primary duty is making sales via mail, telephone, or the internet at his home office or other fixed site, does not qualify for the outside sales exemption because such home office or fixed site is considered the employee’s place of business.

If you have any questions regarding employment law or wages and hours, please contact me, Santiago J. Padilla, Esq., at (305) 824-2400 or contact us online.

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