The information in this blog post refers to the proposed and final rules published by the U.S. Department of Labor in 2015-2016. To see the most recent information, click here.
The Department of Labor’s new rule is expected to extend overtime protections to 4.2 million white-collar workers beginning Dec. 1, 2016. Understanding how it impacts sales employees with complex pay structures is the key to maintaining compliance and mitigating risk under overtime expansion.
Do salespersons’ commissions count toward the threshold?
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- The salary requirements of the regulation do not apply to the outside sales exemption.
- Inside sales employees can be paid on commission, in whole or in part, and be exempt from overtime if they meet three criteria under Section 7(i) of the Fair Labor Standards Act (FLSA).
Inside sales details
Workers who engage in inside sales can be exempt from overtime under Section 7(i). To qualify for this exemption, three conditions must be met:
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- Workers must be employed by a “retail or service establishment.”
- 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 (the equivalent of 168 consecutive hours, or seven consecutive 24-hour periods) in which overtime hours are worked.
- More than half the employee’s total earnings in a representative period must consist of bona fide commission payments.
While the term “retail establishment” may conjure images of brick-and-mortar shops and boutiques, the law’s definition is not so narrow. Under the FLSA, a “retail or service establishment” is defined as “establishments, 75% of whose annual dollar volume of sales of goods or services (or of both) is not for resale; and is recognized as retail sales or services in the particular industry.”
Breaking down ‘bona fide’
When it comes to employment law, the devil is in the details. This is why we need to expound on what constitutes “bona fide commission payments,” according to the FLSA.
The law recognizes certain circumstances under which payments to employees are not considered part of a “bona fide” commission plan and, therefore, would not count toward the last requirement of the exemption. According to a 2006 administrative opinion written by Paul DeCamp, then the wage and hour division administrator for the U.S. Department of Labor, “A commission rate is not bona fide if the formula for computing the commissions is such that the employee, in fact, always or almost always earns the same fixed amount of compensation for each workweek (as would be the case where the computed commissions seldom or never equal or exceed the amount of the draw or the guarantee).”
This can be a complicated matter. Consulting legal counsel would be your best bet to ensure that your commission-based plans for sales representatives qualify as “bona fide” under the law and count toward your inside sales employees’ exemption from overtime.
The content of this blog is intended to keep interested parties informed of legal and industry developments for educational purposes only. It is not intended as legal opinion or tax advice and should not be regarded as a substitute for legal or tax advice.
Sources:
U.S. Department of Labor, Wage and Hour Division: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees – Final Rule
U.S. Department of Labor, Wage and Hour Division: Fact Sheet #17F: Exemption for Outside Sales Employees Under the Fair Labor Standards Act (FLSA)
U.S. Department of Labor: FLSA Overtime Security Advisor: Compensation Requirements
U.S. Department of Labor, Wage and Hour Division: Fact Sheet #20: Employees Paid Commissions By Retail Establishments Who Are Exempt Under Section 7(i) From Overtime Under the FLSA
U.S. Department of Labor, Wage and Hour Division: FLSA Hours Worked Advisor
U.S. Department of Labor, Wage and Hour Division, Opinion Letters – FLSA: FLSA2006-33
U.S. Department of Labor, Wage and Hour Division, Opinion Letters – FLSA: FLSA2006-9
