If you are a business in the US, you may have to comply with the Fair Labor Standards Act (FLSA). The FLSA protects employee rights by regulating overtime pay. Your business can use these settings to get a step closer to compliance.
Before we proceed, let’s first understand:
- What is overtime pay (or overtime)?: A business must pay nonexempt employees overtime pay when they work for over 40 hours in a workweek. The overtime rate is typically 1.5 times their regular rate of pay for each additional hour worked.
As a business, if you do not adhere to overtime wage law, it can lead to severe penalties.
- What is commission pay (or commission/payout)?: Generally, businesses pay salaries to employees. Some businesses also pay employees an additional amount when they make a sale or provide a service. Businesses may pay such commissions in addition to salary/hourly pay or in some cases, pay the amount that is higher between salary vs commission. Generally, commissions are taxed.
Businesses must pay overtime wages to commission employees unless they qualify for an exemption. The exemption ensures that commission employees receive fair wages if they do work overtime hours.
Overtime Pay Exception Rules
Commissioned employees are exempt from overtime wages if they meet all three of the following conditions:
- The employee works in a retail or service establishment.
- During a period with OT, total hourly pay must be more than 1.5 times hourly pay.
- Half of the employee’s total earnings in a representative period are commissions.
Note: This statement assumes that the overtime multiplier was configured as 1.5 times the hourly pay.
Consider this example.
Your business runs on a commission basis, and you pay employees weekly. Your overtime is calculated as 1.5 times the hourly rate. During one week, an employee, Anita, worked 50 hours and earned $2000. Should your business pay her overtime or does she qualify for an exemption? Let’s find out.
Anita meets conditions 1 and 3 above.
To figure out if she meets condition 2 above:
- Calculate Anita’s average hourly rate.
That’s 2000/50 = $40
- Calculate if her regular rate of pay is more than 1.5 times the federal minimum wage. Note: The current federal minimum wage is $7.25.
That’s $7.25 X 1.5 = $10.87
Is Anita’s average hourly rate ($40) greater than 1.5 times the federal minimum wage ($10.87)?
Yes. Since Anita’s average hourly rate exceeds the current federal minimum wage, she is exempt from overtime pay. That is, your business need not pay overtime wages to Anita.