Employees Who Earn Commissions Often Improperly Denied Overtime Pay
Many employers incentivize employee compensation by paying their employees commission payments in addition to an hourly rate or salary. Commonly, employees are paid a lower guaranteed salary or hourly rate in exchange for the possibility of earning larger commission amounts tied directly to their performance. However, if employees earning commissions are covered by the Fair Labor Standards Act (“FLSA”) and work more than forty hours in a week, such employees may be improperly denied overtime compensation through such pay practices. That is because such employees’ regular rates for purposes of determining overtime must include commission payments.[i]
Delayed Commission Payments Can Lead to Incorrect Overtime Wages
Although required by law, many employers and employees still fail to account for commissions when calculating overtime payments. One issue which may compound this problem is commission payments are frequently delayed whereas overtime must be calculated on a workweek basis. For example, an employee may work 50 hours in a workweek and be paid overtime pay on his normal payday but not get paid commissions until the end of a sales quarter or year. Consider the following scenario:
Bill works as a salesperson for a local marketing company. He reports to the office every day and works approximately fifty hours per week at an hourly rate of $12. Bill is paid for his work on a bi-weekly basis where he is paid $18 per hour for his hours over forty in a workweek. In addition, Bill earns commission based on his total yearly sales, which are paid out at the start of the following calendar year.[ii]
Even though Bill has been paid time and one-half his hourly rate ($12/hr X 1.5 = $18), Bill’s company has not properly calculated Bill’s overtime pay if it does not adjust his previous overtime payments to reflect those commissions.[iii] In the words of the U.S. Department of Labor, “[c]ommissions…are payments for hours worked and must be included in the regular rate….It does not matter whether the commission earnings are computed daily, weekly, biweekly, semimonthly, monthly, or at some other other interval.”[iv] Even though the commissions in the scenario above are not paid until the following calendar year, “it is necessary, as a general rule, that the commission be apportioned back over the workweeks of the period during which it was earned.”[v] [vi] To comply with the law, Bill’s employer should pay him additional overtime backpay once commissions have been calculated. If Bill’s overtime rate is never adjusted to reflect an increase in the $18 rate that he was originally paid for his overtime hours, Bill has improperly been denied overtime pay in violation of the FLSA.
Commissioned Employees: Make Sure You Are Earning Fair Wages
If you are an employee whose overtime pay was calculated without accounting for commission payments, contact one of our attorneys at your earliest convenience to determine whether you are owed additional compensation for your work.
[i] See 29 C.F.R. § 778.117.
[ii] This scenario does not reflect the actual experiences of any individual and is only meant to be illustrative of how commission payments are often improperly factored into overtime pay.
[iii] See 29 C.F.R. § 778.119.
[vi] The varying methods regarding how to apportion deferred commissions to workweeks in which the commissions were earned are outside the scope of this blog post and therefore not covered here.
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