FLSA FAQ: Calculating Commissions for Non-Exempt Hourly Employees
Earlier this week in a telecommunications HR group that I participate in, one of the HR professionals asked this question:
Q. How do we pay overtime to hourly inside sales employees that are paid a fixed hourly rate plus commission? Do we pay the base rate only at 1 ½ rate for all hours in excess of 40? Do we pay the base rate plus the commission rate? Simply put, how do commissions figure in, if at all?
If you’re asking this question as an HR or payroll professional, you’re already on the right track in thinking about the “regular rate.” Overtime premiums for hours worked beyond 40 in a workweek for non-exempt employees under the Fair Labor Standards Act (FLSA) and applicable state laws are always based on the employee’s regular rate. However, the regular rate can be confusing for commissioned employees. In our example above, the regular rate does not include only the employee’s hourly wages (or salary, if the employee is a salaried, non-exempt employee). Instead, the FLSA defines the “regular rate” more broadly to include “all remuneration for employment paid to, or on behalf of, the employee,” except for certain enumerated types of payments. Under the FLSA, remuneration that employers must add to the regular rate includes not only commissions but also non-discretionary bonuses, shift differentials, hazard premiums and other incentive payments based on hours worked, production, or efficiency.
The FLSA (but maybe not applicable state law) specifically excludes, among other things, paid leave (vacation, PTO, sick leave, etc.); expenses incurred on an employer’s behalf; overtime premiums; Saturday/Sunday/holiday premiums; discretionary bonuses; and, more rarely, some gifts and payments on special occasions. Many of these categories have their own nuances, such as “discretionary” vs. “non-discretionary” bonuses or fringe benefits that we will set aside for future posts.
Sales commissions are payments based on production or efficiency, in most cases, so they would be added to the regular rate. The calculation itself is simple once you have identified all of the necessary remuneration. Employers compute the regular rate for an employee by dividing the employee’s total remuneration for employment in the workweek by the total number of hours the employee actually worked in that week. An employee who received $400 in wages, $75 in commissions, and $25 in non-cash compensation (say, free lunches in the company cafeteria) in a week while working 50 hours has a regular rate of $10.00/hour ($500 / 50 hours). Assuming that the $500 in cash and non-cash compensation was intended to compensate the employee for all 50 hours of work, and not just 40, you would owe the employee another $50 ($5.00/hour overtime premium for the 10 overtime hours). If the compensation only covers 40 hours, you would owe the full time and a half overtime premium instead.
Simple, right? Sure, if all of the compensation is earned during the workweek before you run payroll. Often, though, employers do not pay commissions or bonuses at the same time they pay for the hours worked. Instead, employers often pay commissions or bonuses at some later date, like the end of a month, quarter, or year. Depending on exactly when these commissions or bonuses are “earned” under company policy (and any applicable state or local laws), you may need to run a lookback calculation to apportion these later earnings to their proper, earlier weeks.
As always, “regular rate” calculations are highly fact- and jurisdiction-specific. Not only do the FLSA, state laws, and local laws impact these calculations, but so do your specific company policies. If you are not sure whether or how to include a particular form of remuneration in your calculations, reach out to wage and hour counsel first. Miscalculating the regular rate can get expensive quickly, particularly if the miscalculation affects an entire group or department of employees.
Tomorrow, I’ll explain how this lookback calculation works for commissions calculated and earned after a workweek ends.