Sales Commission in Retail and Service Establishments

When an employee is paid a certain sum of money on completion of a task, that employee works on a sales commission basis. The completed task is often the sale of a certain amount of goods or services. Sales commission can stand alone or be coupled with a salary. In some cases, sales commission takes the place of an employee’s salary.

Generally, an employer is not required to pay overtime to workers who receive sales commission. This is due to the Section 7(i) overtime exemption for commissioned employees stated in the Fair Labor Standards Act (FLSA). Section 7(i) illustrates three conditions that must be met in order for the exemption to apply:

  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.

For purposes of the Section 7(i) exemption, tips paid to service or retail workers by customers are never considered commissions.

‘More Than One Half Times the Minimum Wage’ Condition

A specific formula is used to determine whether an employee meets the “more than one half times the minimum wage” condition. For this, the employer must total an employee’s total earnings for the representative period and divide it by the employee’s total hours worked during the period. If the result is greater than time and one half the minimum wage, the condition has been met.

Meeting the ‘Greater-Than-50%-Commissions’ Condition

First, to determine whether the greater-than-50%-commission condition has been met, an employer must select a representative time period to be used for calculating the commission rate. If, during this time period, the employee’s pay consists entirely of commissions, or if the commision totals are always greater than salary or hourly wage payments, then the condition is met.

If not, the employer must use a different method of calculation. It must total the amount of commision paid and the amount of other compensation paid and compare the two. Only when the sales commission totals are greater than the amount of other compensation will the greater-than-50%-commission condition be met.

Special Circumstances

Hotels motels and restaurants are often special circumstances for purposes of applying the Section 7(i) provision. These entities often pass along service charges to customers. If an employee is paid a portion of the service charges, this income may be considered commission according to the FLSA. In addition, if the income from such charges allows employees to meet the conditions of Section 7(i), the employee is exempt from receiving overtime pay.

Complicated Subjects Need Legal Expertise

The topic of sales commission is often an extremely complex one. Problems can arise, for instance when employers do not keep accurate earnings records or manipulate representative time periods to their unfair advantage. For legal experience in the area of sales commissions that you can trust, give Shegerian & Associates a call today.

Source: Department of Labor Fact Sheet http://www.dol.gov/whd/regs/compliance/whdfs20.pdf.