A lot of employers pay certain workers on a commission basis, and there’s nothing necessarily wrong with that unless it causes the workers to be paid less than the minimum wage or to not be paid overtime for hours worked beyond 40 per week. Mistakes can subject employers to liability for back wages, liquidated damages, and civil penalties.
Businesses paying workers on a commission basis, especially those who pay on a commission-only basis, should ensure that their pay practices pass muster under the Fair Labor Standards Act and applicable state laws. Under the FLSA, covered employees who are paid on commission must be paid at least the minimum wage (currently $7.25/hour), just as employees who are paid on an hourly or per-piece basis. Likewise, they must receive overtime pay for all hours worked in excess of 40 hours in a workweek at a rate of at least 1.5 times their regular rate of pay. The “regular rate of pay” includes commissions.
So, can an employer ever deviate from these standards? Maybe.
The FLSA does exempt certain employees of retail and service establishments who are paid on a commission basis, in whole or in part, from the overtime requirement. (To be a “retail or service establishment,” a business must get at least 75% of its sales revenue from sales that aren’t resale and make sales of goods or services that are considered as retail sales in the particular industry.)
If a retail or service employer wants to avoid paying overtime to commissioned employees, two conditions must be met:
(1) the employees’ regular rate of pay must exceed 1.5 times the applicable minimum wage for every hour worked in a workweek (not just those hours beyond 40); and
(2) more than half of the employees’ total earnings must consist of commissions on sales of goods or services.
Unless both conditions are met, the exemption is not applicable and overtime must be paid for all hours worked in excess of 40 hours in a workweek at a rate of at least 1.5 times the regular rate of pay.
Under the current administration, the Labor Department has made enforcement of overtime, minimum wage, and other wage and hour laws a top priority. The agency uses smart phone apps, social media, and many other new tools and resources to find and prosecute violators. Healthcare, technology, retail/hospitality, and certain other industries have been specifically targeted.