Commission-Paid Salespersons Entitled To Overtime Unless Specifically Exempted
January 1, 2000
Given the complexity of the Fair Labor Standards Act, it is often difficult
for employers to determine whether commission-paid salespersons are entitled to
overtime pay when they work over 40 hours in a work week. If an employer
improperly denies an employee overtime pay in violation of the FLSA, it could be
liable for the unpaid overtime, liquidated damages, and the employee's
attorneys' fees.
The FLSA requires employers to pay workers who are not exempt from the FLSA's
protections (nonexempt employees) overtime pay in an amount of one and one-half
times their regular hourly rate for each hour they work over 40 in a work week.
This rule generally applies to all nonexempt employees, including those paid by
commissions instead of an hourly wage.
Employers often mistakenly believe that their commission-paid salespersons
are exempt (and, thus, need not be paid overtime pay) under the well-known and
commonly utilized exemptions for "white collar" professionals.
However, the white collar exemptions for executive, administrative and
professional employees are only available if the employee is paid on a salary
basis. That is, the employee regularly receives each pay period a predetermined
amount representing all or part of the employee's compensation that is not
subject to reduction based upon the quantity or quality of the employee's work.
Accordingly, strictly commission-paid employees, by their very nature, cannot
fall under the white-collar exemptions.
The FLSA provides three types of exemptions that could apply to
commission-paid salespersons. First, commission-paid salespersons could be
exempt from overtime pay under an industry-specific or job-specific exemption.
For example, the FLSA specifically exempts salespersons primarily engaged in
selling or servicing automobiles, trucks, farm implements, trailers, boats or
aircraft.
Second, commission-paid employees could be exempt as "outside"
salespersons. The exemption for outside salespersons is met if the person is
employed "for the purpose of and who is customarily and regularly engaged
away from his or her place or places of business" in making sales or
obtaining orders. According to FLSA regulations, the outside salesperson must
spend at least 80% of his or her time performing duties away from his or her
place of business or performing work that is incidental to such off-site work
(e.g., preparing order forms, making collections, etc.).
Finally, commission-paid "inside" salespersons could be exempt
under a special exemption for commission-paid employees of "retail or
service establishments." This exemption applies if the employee works in a
"retail or service establishment" (as specifically defined by FLSA
regulations) and (1) receives a regular rate of pay that is in excess of one and
one-half times the applicable minimum wage and (2) more than half of their
compensation represents commissions on goods or services. These employees
typically are the salespersons that sell "big ticket" items, such as
furniture, major appliances, radios and televisions, and men's clothing.
In sum, in determining whether a commission-paid salesperson is exempt from
overtime pay, employers should ask themselves three questions: (1) Does the
salesperson fall under an industry-specific or job-specific exemption? (2) Does
the salesperson qualify as an exempt outside salesperson? and (3) Does the
employee qualify for the exemption for commission-paid employees of "retail
and service establishments?" If the answer to all of these questions is
"no," then the commission-paid employee is probably entitled to
overtime pay.
For more information please call Dennis McClelland at 1-888-688-8500.
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