Many retail and service employers try to simplify their payroll obligations by labeling certain employees as “commission” or “commission only.” While federal law permits this practice in some circumstances, the rules are complicated and present many traps for the unwary. We discuss some of these potential pitfalls below, but the bottom line is simple: Employers should approach this practice with caution and must be prepared to substantiate the applicability of the exemption to each employee.

The federal Fair Labor Standards Act (FLSA) requires covered employers to pay employees overtime if they work more than 40 hours in a week, unless the employee falls into a specified exemption. One such exemption is for the commissioned salesperson (not to be confused with the outside salesperson). Where it applies, employers need not pay overtime compensation. The exemption applies to: 1) commissioned employees of retail or service establishments, 2) whose regular rate of pay is over 1.5 times the minimum wage for every hour worked in a workweek in which overtime hours are worked, 3) where over half the employee’s compensation for a representative period represents commissions on goods or services. 29 U.S.C. § 207(i) (Section 7(i)). Unless all three requirements are met or another exemption applies, overtime pay must be paid for all hours worked over 40 in a workweek at time and a half the regular rate of pay. Because the regular rate of pay for these employees includes commissions, overtime may be costly. Whether an employee falls within the exemption requires a detailed analysis that must be documented and regularly reevaluated. Mistakes may prove costly, as employers who fail to comply may be liable for damages, penalties, and attorneys’ fees.

Rationale Behind the Exemption

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