Commission Employee Labor Laws: Everything You Need to Know
Commission Employee Labor Laws will be laws that numerous workers are most likely not mindful of. 5 min read
Updated June 23, 2020:
Commission Employee Labor Laws
Commission Employee Labor Laws are laws that cover the amount of commission that can be earned for employees earning such commissions. These laws also cover the minimum amount of additional pay that employees must receive, which can include certain bonus pay as well as overtime pay.
A business commission is a certain amount of money paid to perform various acts or duties. Some employers utilize commissions, particularly in sales roles, to help employees work harder knowing that they are in charge of how much money they can make at any given time. However, commission-only pay is not permitted as employers are required to supplement employees with a minimum pay standard that is generally required by the state’s minimum wage laws. However, this can be tricky since every employee earning commission makes a different amount than their colleagues.
In order to abide by legal requirements, companies must take into account each employee’s commission take-home, and make up for the difference if the commission earned is less than the hourly wage rate for that specific state.
Exemptions That Apply to Commission Paid Employees
There are several exemptions that apply under the FLSA, including:
- Executive employees
- Administrative employees
- Professional employees
- Computer employees
- Outside salespersons
- Highly compensated employees
 Executive Exemption
The executive exemption applies to only those operating in a managerial function with a threshold salary. The minimum salary to qualify for this exemption is $685/week or $35,568/year. Executive employees must also be paid on a salary basis, and therefore, exempt.
 Administrative Exemption
The administrative exemption is similar to the executive exemption in that the same monetary thresholds must be met. However, in addition to the monetary requirement, the following must also be met:
- The employee’s duties at work must be office related duties, including but not limited to accounting, tax-related work, advertising, marketing, quality control, budgeting, etc.
- Other duties must include the exercise of discretion and judgment with respect to certain matters in the workplace.
 Professional Exemption
The professional exemption also shares the same monetary requirement of $684/week or $35,568/year as well as the fact that the employee must be paid a salary and not hourly wage. Additionally, this type of employee must be either a “learned professional” or “creative professional.”
A learned professional is one whose primary duty at work requires advanced knowledge of a particular area. This area must be in a field of science or learning, such as law, medicine, engineering, accounting, teaching, science, architecture, etc. This advanced knowledge must have been earned over a prolonged period of time in an academic setting. Therefore, a learned professional would be a doctor, lawyer, scientist, dentist, engineer, or someone in a similar position.
A creative professional is one whose work requires creativity, imagination, originality, and the like. This would include artists, composers, actors, and dancers.
 Computer Employees
In order to qualify for this exemption, a computer employee must meet the general monetary threshold and work as a computer systems analyst, programmer, software engineer, or the like. Primary duties must include:
- Designing, testing, documenting, and otherwise overseeing computer programs, prototypes, functional applications, and computer-generated software and hardware.
 Outside Sales Persons
In order to qualify for this type of exemption, you must meet the following requirements:
- You must be engaged in daily work duties outside of the work office
- Your primary duty must be to make sales or create contracts for services in which clients pay compensation
If you earn at least $107,432/year, operate in an office position or non-manual work, and perform one or more of the duties required by the executive, administrative, or professional exemptions, then you will qualify for the highly compensated employee exemption.
- If you work overtime, you must be paid 1.5 times your hourly rate
- If you are exempt (as noted above in the various exemptions), then you are not required to be paid overtime
- If you earn tips, your employer must make up for the difference in the hourly minimum wage rate versus what you have received in tips. However, some employers will pay employees who earn tips the minimum hourly wage rate, and allow those employees to also earn tips (i.e., restaurant establishments)
Retail or Service Qualifications
The Department of Labor identifies which businesses qualify as retail or administration foundations. No less than 75 percent of the business' yearly revenue must originate from sales (and not re-sales).
The U.S. Bureau of Labor has strict requirements for complying with all employee labor laws. Businesses who neglect to conform to the FLSA wage prerequisites are liable to fines and punishments.
FLSA Minimum Wage Poster
The FLSA Minimum Wage Poster provides an overview of the laws in this area. It is required that employers showcase the poster in a plain-view area for employees to see.
As previously noted, there are in fact specific laws pertaining to commissioned employees that are set forth in the FLSA. As such, if the commission being earned does not meet the mandated minimum wage rate for that particular state, then the employer must supplement the employee’s income. With that being said, most employers who hire commissioned employees generally provide a minimum wage rate, and all commissions earned by employees is additional income earned. With regard to overtime pay for commissioned employees, the same law holds true. Therefore, only if the employee fits into one of the exemptions mentioned above is the employer not required to pay overtime to the employee, whether or not the employee earns commission.
Examples of Labor Laws
Take, for example, a minimum wage rate of $7.25/hour. A sales representative is paid $5/hour and also earns 10 percent of any deals he or she successfully makes. Let’s assume that, one week, the employee worked 40 hours and sold $500 in deals, gaining a total commission of $50. Since the employee has earned a total of $250 throughout the week ($200 in compensation and $50 commission, equivalent to $6.25/hour), the business must compensate for the shortfall. Therefore, the employer will owe the employee $1/hour totaling $40.
Another example is an employee who earns $10/hour in addition to commissions. Throughout one week, she earns $1,000 in commissions and works a total of 50 hours during that workweek. For the additional 10 hours of work, the employee earns $15/hour ($10 plus 1.5 times that amount). Therefore, in total, the employee has earned $1,400.
Now let’s assume we have a tipped worked who earns $2.13/hour but has a lawful right to earn the minimum wage rate of $7.25/hour. Throughout one week of work, the employee works 50 hours and earns $800 in tips. Therefore, if he had earned $7.25, he would have made the following:
- $7.25 x 40 = $290
- $7.25 (x1.5) = $10.875 x 10 (additional hours over 40) = $108.75
- $800 in tips
- Total: $1,198.75
If we add up what he did, in fact, make, however (by utilizing $2.13/hour), he made a total of $906.50. Therefore, he fell short a total of $292.25, which is the amount that the employer will need to pay the employee to make up for the difference.
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