In House - The FindLaw Corporate Counsel Blog

3 Common Legal Issues When Paying Employees by Commission

Companies that use commissions as a significant part of employees' pay may be able to take advantage of the Fair Labor Standards Act's commission-based employees exemption. Under this exemption, employers aren't required to pay overtime to certain commission-based workers. That can mean big savings.

Of course, an in-house lawyer knows that employment regulations are never simple or straight-forward. Rather, they're full of pitfalls that can leave an employer exposed to costly litigation and penalties if they don't do things properly. A good GC needs to know how to take advantage of the exemption while avoiding its hidden traps.

Here are three of the most common ways employers trip up when dealing with commission-based employees:

1. Misclassifying Employees

Commission-based employees are generally not entitled to overtime, but in order to be exempt, they must fall within the specific exemptions established by the FLSA. For example, commissioned salespersons are exempt from overtime pay only when: (1) the employer is a retail or service business, (2) their base hourly rate is 1.5 times higher than the minimum wage, and (3) commissions make up more than half of their compensation. Should any of those elements not be met, overtime pay is owed -- and the FLSA can impose costly fines for violations, including double back pay, damages, penalties, and attorneys' fees. Regularly documenting which employees are exempt and why can help you avoid a wage and hour dispute down the line.

2. Ignoring the Exceptions to the Exemptions

The FLSA's overtime exemption is itself full of exemptions. For example, the commission-based employees exemption described above applies only to "retail or service" establishments. Federal regulations limit that to publicly accessible establishments and certain types of sales, such as insurance, electric, and accounting sales are excluded altogether.

Since the commission pay must make up more than half the employee's compensation, whether he or she is exempt may shift from period to period. That means employers must regularly account for the employee's commission rate to ensure that the requirement is being met.

3. Forgetting About State and Local Laws

We can only touch the surface of the federal regulations here -- they also cover everything from record keeping to what can be counted as a commission. Many jurisdictions also impose their own requirements. Not every state has a commissioned salesperson exemption, for example, and some impose requirements above and beyond the federal law. In California, all commission-based employees must have written contracts setting forth how their commission is to be computed and paid.

Which is to say, while commission-based exemptions can provide an economic benefit to many companies, in-house counsel needs to remain vigilant that employers are complying with the requirements of federal, state and local laws and maintaining detailed records. Failure to do so could mean expensive litigation later on.

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