To protect employee rights, the Fair Labor Standards Act (FLSA) regulates overtime. But, some employees are exempt from receiving overtime pay. If you offer commission pay to employees, you might be wondering if they are exempt from overtime. What are your responsibilities when it comes to commission employees and overtime?
First, you must understand how overtime works, as well as what commission is. Then, learn about overtime rules for commission employees.
Overtime recap
You must pay nonexempt employees overtime pay when they work over 40 hours in a workweek. The overtime rate is 1.5 times their regular rate of pay for each additional hour worked.
Violating overtime wage law can lead to back wages and penalties. Carefully classify your employees and track their times to avoid overtime wage violations. If you do neglect to give an employee overtime pay, you must provide retro pay to make up the difference.
Commission recap
Generally, employers offer hourly or salary wages to employees. But in some industries, like retail, employers commonly give commission pay to employees. Commission is a type of supplemental pay that you give employees when they make a sale or accomplish another goal.
You can pay an employee both regular wages and commission. Or, you might exclusively give an employee commission pay. Commission wages are either a percentage of a sale or a flat rate.
Like regular wages, you must withhold taxes from commission pay. You also need to follow labor laws for commission-only employees, such as minimum wage and recordkeeping rules.
What about overtime? Do you need to provide overtime pay to commissioned employees?
Commission employees and overtime rules
You must pay overtime wages to commission employees unless they qualify for an exemption. The exemption ensures that commission employees receive fair wages if they do work overtime hours.
Commissioned employees and overtime exemption
According to the Department of Labor, commissioned employees are exempt from overtime wages if they meet all three of the following conditions:
- The employee works in a retail or service establishment
- The employee’s regular rate of pay is more than 1.5 times the minimum wage for each hour worked in a workweek where the employee works overtime
- More than half of the employee’s total earnings in a representative period are commissions
To find out whether an employee earns at least 1.5 times the minimum wage, you can add up their total earnings during a pay period and divide by the total hours worked.
Employers set representative periods. A representative period cannot be more than one year. For example, you might use one month as a representative period.
Exemption example
Let’s say a commission-only employee is a car salesman. You pay the employee weekly. During one week, the employee worked 50 hours and earned $2,000. Are they exempt from overtime?
The employee meets conditions one and three. To find out if they meet the second DOL condition, divide their weekly earnings of $2,000 by 50 hours. Then, determine if their regular rate of pay is more than 1.5 times the federal minimum wage. The current federal minimum wage is $7.25, so the employee’s pay must be greater than $10.88 ($7.25 X 1.5).
$2,000 / 50 = $40
The employee’s average hourly rate of $40 is more than 1.5 times the federal minimum wage. As a result, they are exempt from overtime pay.
Overtime for nonexempt commissioned employees
Calculating overtime for commissioned employees is your responsibility if they do not qualify for an overtime exemption. Pay nonexempt commission employees at least time and one half multiplied by the minimum wage for any overtime hours worked.
Check with your state for more specific overtime requirements. For example, California considers overtime to be any hours worked above eight in one workday.
You should familiarize yourself with your state’s minimum wage law, too. If your state or locality has a higher minimum wage than the federal law, you must pay employees at least the state or local minimum wage rate.
No matter how you pay employees, you need a reliable way to run payroll, calculate overtime wages, and withhold taxes. Patriot’s online payroll software lets you run payroll using a simple three-step process. Get your free trial now!
This article is updated from its original publication date 10/24/2018.
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