Minimum Wage and Commission Only Employees
Federal and state minimum wage laws apply even if an employee is not paid on an hourly basis. Even if your commission earned over the year exceeds the required hourly rate, you should be paid at least minimum wage for each week worked. You should also know that a recent court decision requires commission-only employees to be paid at least 1.5 times minimum wage for eligible Sunday work.
Calculating the Minimum Wage Ract for Employees Who Are Paid Commissions
If you are a commission only employee, the total amount of your commissions each week divided by hours worked should equal $12.75 per hour in 2020. If you have long sales cycles, you may have periods in which your pay is not compliant with minimum wage laws. For example, if what you are selling typically requires several months of customer cultivation to result in a sale, you could go a month or more without adequate compensation. Even if the ultimate payout is significant when the sale closes, the time you went without compensation might violate the law.
Many employees are paid with a combination of salary and commissions. In this case, in each week your sales commission plus your weekly salary divided by hours worked should equal the minimum hourly rate.
Calculating Hours Worked for Commission Based Employees
The other challenge for sales employees is that their time is often not tracked. Where compensation is driven by sales made and not hours worked, it can be hard to know whether they work 40 hours a week, 50 hours a week, or some other number.
If you have no other information, you should assume for purposes of minimum wage compliance that your full time employees work 40 hours a week.
For a lot of reasons, however, it is a good idea for employers to find a way to document hours. Your sales employees may claim to work more hours than that. They may claim this entitles them to more compensation in minimum wage. They also may claim they are entitled to 1.5 times their regular rate of pay for overtime. If you do not have a way to prove otherwise, they may be able to make a claim for minimum wage or overtime violations.
Best Practices for Commission Based Employees
To avoid liability under the minimum wage laws, employers should consider structuring the compensation to guarantee the required hourly rate. One example is to provide a base salary that equals at least $12.75 based on a 40 hour workweek.
Another is to offer a guaranteed draw against commissions. The commission compensated employee would be guaranteed an amount each week that equals minimum wage. That draw can then be offset against future commissions. Be careful, however. The employee must be paid minimum hourly wage in every pay period. This means you cannot offset future commissions if it would bring them below minimum wage.
You also have to be mindful of the rules about deductions and set offs from wages. If you are going to offer a guaranteed draw against commissions, you should consult with an employment lawyer to make sure it is structured lawfully.
Documenting Your Commission Plan
Many commission plans are inadequately documented. This can result in disputes about minimum wage, overtime pay and timely payment of wages. The possibility for confusion is higher because the timing and calculation of payment are often very specific to your business or industry.
If there is a dispute about payment of commissions, the first place a court will look is to the payment terms in your commission plan. If you do not have a written plan, or a plan at all, the court may infer or assume terms that you did not mean to apply.
If you pay employees based on commissions, in whole or in part, it is important to consult with an employment attorney.
How We Can Help
We can help you navigate these issues and get clarity on your rights and obligations as an employer or an employee. You can use the button below to schedule a call back from a member of our team, give us a call at 781-784-2322, or fill out our web form to let us know a little more about your situation.