The regular rate exclusions: discretionary bonuses and signing bonuses.

Hey, guess what?  Emily is back.  

Last time we discussed the requirements for excluding gifts and Christmas bonuses from the regular rate under the FLSA. Now we are going to discuss discretionary bonuses, which are quite similar.

Under the Regs, you can exclude from the calculation of the regular rate:

(3) Sums paid in recognition of services performed during a given period if . . . (a) both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.

29 CFR § 778.200 (a)(3). Like gifts and holiday bonuses, for the employer to exclude a discretionary bonus, the employer cannot be obligated to pay it. As soon as the employer promises to pay the bonus, whether in a collective bargaining agreement, or in a handbook or policy manual, the bonus is no longer discretionary and must be included in the regular rate. See O’Brien v. Town of Agawam, 350 F.3d 279, 295-96 (1st Cir. 2003). Also, if the bonus is tied to objective criteria like production numbers, efficiency rates, or even attendance, it is not a truly discretionary bonus and cannot be excluded from the regular rate. One caveat – according to the Department of Labor, it is okay to document the decision to pay the bonus in writing before the bonus is paid, as long as the employer did not previously promise the bonus. U.S. Dep’t of Labor FLSA Op. Letter 2008-12, (December 1, 2008).

What you can’t do is say in your employee handbook that you retain discretion to pay an annual or other periodic bonus when you pay it every year – it’s not discretionary just because you say so. The same is true for performance-based bonuses. For example, back when I was a seller of toys, we had a bonus program with a clear performance-based structure. If we hit daily sales targets, we were paid a bonus for each hour worked on that day. If my employer put something in the employee handbook about that bonus being discretionary, the bonus would still need to be included in the regular rate because it is tied to objective performance criteria, the sales targets. Hmmm . . . I think they might owe me a dollar or two.

You may be thinking, “What about a signing bonus?” Signing bonuses come in two flavors: up-front payments before work begins and deferred payments paid after a particular length of service. The up-front payments do not need to be included in the regular rate, but the deferred payments do. Those deferred payments are meant to encourage employees to remain at their job, and the Regs specify that they cannot be excluded. 29 CFR § 778.211(c). Since an up-front signing bonus isn’t related to the employee’s length of service, it can be excluded from the regular rate. Minizza v. Stone Container Corp. Corrugated Container Div. East Plant, 842 F.2d 1456, 1462 (3d Cir. 1988).

Next time, we’ll take on the thrilling topic of percentage bonuses.

Screening your employees to see if they are stealing isn’t stealing time.

You have a bunch of employees that work in your warehouse. You also have a bunch of really cool stuff that you ship from your warehouse. Apparently, you don’t trust your employees, because at the end of each shift you require your employees to wait around while you conduct security screens of each employee to make sure that they are not walking out of the warehouse with your really cool stuff. Do you have to pay your employees for the time they spend (up to 25 minutes each day by the way) waiting to go through your security screen? According to the Supreme Court the answer is a big old NO!

Yesterday, SCOTUS issued its opinion, a unanimous opinion by the way, in Integrity Staffing Solutions, Inc., v. Jesse Busk et al., 574 U.S. __ (2014). You can see it here.

“Integrity Staffing Solutions, Inc. provides warehouse staffing to Amazon.com throughout the United States. Respondents Jesse Busk and Laurie Castro worked as hourly employees of Integrity Staffing at warehouses in Las Vegas and Fenley, Nevada, respectively. As warehouse employees, they retrieved products from the shelves and packaged those products for delivery to Amazon customers.”

Id.

According to the opinion, at the end of each shift Integrity requires its employees to pass through a metal detector. From the sounds of it, it was like boarding a plane without the pat down or full body scan. You know, you take your keys and wallet and stuff out of your pockets and walk through a metal detector. We do that all the time now, don’t we, at airports, going into stadiums, even at some schools. No big deal, right? Seems like it was a big deal for the employees. They filed suit claiming that the failure by Integrity to pay for the time it took for these screens, up to 25 minutes per day according to the plaintiff’s, should have been paid under the FLSA. They argued that the screenings were to prevent theft and thus “solely for the benefit of the employers . . . .” Id.

SCOTUS disagreed. First, the Court pointed to the Portal-to-Portal Act and reminded us that “activities which are preliminary to or postliminary to said principal activity or activities” are excluded from the FLSA’s coverage. We talked about this a while ago. Remember Donning and Doffing? Check it out here. Then the court reminded us that principal activity includes activities that are an integral and indispensable part of the principal activity. The question, according to the Court, “Was the waiting time for the screen an ‘integral and indispensable part of the principal activities’ of the employees?” If it is, it is paid time. If it is not, it is unpaid time.

The Court then said that an activity is “integral and indispensable to the principal activities that an employee is employed to perform if it is an intrinsic element of those activities and one with which the employee cannot dispense if he is to perform his principal activities.” Like, the Court said, “showering and changing clothes” after working with toxic chemicals, or “sharpening knives” in a meat packing plant but not “donning protective gear” in a poultry plant.

Ultimately, the Court held that the security screenings at issue were not compensable. In short, the company does not have to pay the employee’s while they wait for their turn to go through the metal detector.

SCOTUS said, quite logically, screenings were not “principal activities” pointing out that the company did not employ the employees to be screened. They employed them to ship products. Then the Court noted that the screenings were not “integral and indispensable” to shipping products. The Court stated that the employees could have very easily continued to ship products even if the screenings stopped. They also could have walked off with a bunch of really cool stuff form the warehouse. The Court didn’t say that I did and Integrity must be worried about it of why do the screens?

Then the Court noted that the 9th Circuit erred when it focused on the fact that the employer required the screenings stating: “If the test could be satisfied merely by the fact that an employer required an activity, it would sweep into “principal activities,” the very activities that the Portal-to-Portal Act was designed to address.” Id. Makes sense again right? I mean like I said before, who would drive to work if their employer didn’t make them do it? Especially today when so many jobs can be done remotely. And finally, the Court rejected the employee’s argument that they should get paid for waiting simply because the employer could, if they wanted, shorten the waiting time. Basically, the court said deal with it at the bargaining table it is not covered by the FLSA.

Again, you can see the whole opinion here if you are interested.  Oh and by the way, I wrote this one, we will get back to Emily next time.

No, no, don’t count that. The regular rate exclusions: gifts

OK, I have to tell you something before we get started. I did not write this post. In fact, I did not write any of the next 8 posts. Emily Rucker did. Emily is one of our new associates and she is really smart. Turns out she is pretty funny too. I hope you enjoy and learn something.

Steve.  Oh, and here is a picture of Emily so you can put a face with a name when you hire her to be your lawyer.

Emily

I know you’re sick of talking about the regular rate. I’m sorry. I really am. But we haven’t covered everything yet. In the last few weeks, we did some painful calculations to figure out the “regular rate” for overtime purposes. And by painful, you know I mean painful for Steve because he hates math. Now we are going to talk about what you can exclude when calculating the regular rate. The good news is that since we are excluding instead of including, the math will be kept to a minimum. We’ll take the exclusions one at a time.

One important note before getting into the meat of the rules: most of the payments excluded from the regular rate cannot be credited towards overtime compensation, but a few of them can. I’ll note those cases as they come up.

First, we’ll take on “bonuses”. As we discussed earlier, some kinds of bonuses must be included in the calculation of the regular rate, like those for employees who get an hourly rate plus a production bonus. Some types of bonuses do not have to be included. One of the kinds that can be excluded are bonuses that are really gifts.

Gifts? Yea, gifts, you know, like Christmas gifts  (other holidays are relegated to “special occasions” under the regs). Although the traditional Christmas bonus seems to be going the way of the passenger pigeon for many employers, it was still an important part of compensation at the time the FLSA was passed. According to sociologist Vivian A. Zelizer, Christmas bonuses started when employers began replacing gifts like turkeys and gold coins with cash around the turn of the 20th century. They became a common way to keep workers happy, especially before overtime rates came into the picture with the FLSA. Apparently people like cash better than turkeys – who knew?

The FLSA excludes the following from the regular rate:

(1)                   Sums paid as gifts; payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency

29 CFR § 778.200 (C)(1).

Thanks, you shouldn’t have. If the gift is really a bonus based on the quantity or quality of the employee’s work, you must still include the amount in the regular rate computations. The regs give some further guidance on this concept:

(b) Gift or similar payment. . . . the bonus must be actually a gift or in the nature of a gift. If it is measured by hours worked, production, or efficiency, the payment . . . is no longer to be considered as in the nature of a gift. If the payment is so substantial that it can be assumed that employees consider it a part of the wages for which they work, the bonus cannot be considered to be in the nature of a gift. Obviously, if the bonus is paid pursuant to contract (so that the employee has a legal right to the payment and could bring suit to enforce it), it is not in the nature of a gift.

Once, I worked at a toy store, and we went to a retail show to sell toys. We didn’t make much money, so when the weekend was over my “bonus” was a stuffed goat. I still have it. His name is Herman. Since my employer never promised a bonus, and I did not receive the goat based on my performance, the value of that stuffed goat did not need to be factored into the regular rate. The regs give you a little more flexibility when it comes to yearly gifts like Christmas bonuses:

(c) Application of exclusion. If the bonus paid at Christmas or on other special occasion is a gift or in the nature of a gift, it may be excluded from the regular rate . . . even though it is paid with regularity so that the employees are led to expect it and even though the amounts . . . vary with the amount of the salary or regular hourly rate of such employees or according to their length of service with the firm so long as the amounts are not measured by or directly dependent upon hours worked, production, or efficiency.

29 CFR §778.212(a)-(b). To continue with the goat example . . . if on my birthday I received one stuffed goat or another stuffed cloven-hooved creature for every year I worked at the store, the value of the stuffed goat need not be included in the regular rate. But if I received one goat for every ten goats sold, then the value of the goats must be included.

See, that wasn’t so bad? No math at all. Next week, we’ll take on discretionary bonuses and signing bonuses.

 

The regular rate and commissions. Part Last.

That’s a couple of weeks just talking about how commissions can affect the regular rate. That seems like a lot, doesn’t it? Well, this is the last time – in fact this is the last time in something like 10 or 12 posts that we will be talking about adding things to the hourly rate to get to the regular rate. So what do we have left? Well, just a couple of minor points that will wrap all of this up. The first deals with delays in computing commission payments. The DOL recognized that the business world does not run in nice neat little time chunks. So they understood when they drafted these Regulations that especially with commissions you could not expect to wrap it up all in one neat little package. So?

If there are delays in crediting sales or debiting returns or allowances which affect the computation of commissions, the amounts paid to the employee for the computation period will be accepted as the total commission earnings of the employee during such period, and the commission may be allocated over the period from the last commission computation date to the present commission computation date, even though there may be credits or debits resulting from work which actually occurred during a previous period. The hourly increase resulting from the commission may be computed as outlined in the preceding paragraphs.

29 CFR § 778.121.

Basically, you get a break, and if, after you have computed and allocated commission payments for your defined period, there are changes due to, say, payments not being made, or bounced checks or some other thing that would change the commission, you don’t have to go back and do it all over again. You can allocate those changes to the new period even though the work was done in the last period.

And last, and what I would consider really rare, you can use a basic rate for employees paid wholly or partly on commission. Go here for a discussion of the basic rate. And here is that Reg:

Overtime pay for employees paid wholly or partly on a commission basis may be computed on an established basic rate, in lieu of the method described above. See §778.400 and part 548 of this chapter.

29 CFR § 778.122.

Next time we are going to move into Part C of Section 778 of the Regulations and start talking about some things you get to exclude rather than include in the regular rate. And next time, I have a surprise for you.

 

The regular rate and commissions. Part 3.

Remember last week we had another cliff hanger and I left you with trying to figure out how you compute the regular rate for an employee who is paid commissions that can’t be allocated to a specific workweek. All right, who read ahead? Come on admit it, this was just so exciting you couldn’t wait to find out, now could you? Admit it! Well if you didn’t read ahead, here is what the Regulation says:

If it is not possible or practicable to allocate the commission among the workweeks of the period in proportion to the amount of commission actually earned or reasonably presumed to be earned each week, some other reasonable and equitable method must be adopted. The following methods may be used:

(a) Allocation of equal amounts to each week. Assume that the employee earned an equal amount of commission in each week of the commission computation period and compute any additional overtime compensation due on this amount. This may be done as follows:

(1) For a commission computation period of 1 month, multiply the commission payment by 12 and divide by 52 to get the amount of commission allocable to a single week. If there is a semimonthly computation period, multiply the commission payment by 24 and divide by 52 to get each week’s commission. For a commission computation period of a specific number of workweeks, such as every 4 weeks (as distinguished from every month) divide the total amount of commission by the number of weeks for which it represents additional compensation to get the amount of commission allocable to each week.

(2) Once the amount of commission allocable to a workweek has been ascertained for each week in which overtime was worked, the commission for that week is divided by the total number of hours worked in that week, to get the increase in the hourly rate. Additional overtime due is computed by multiplying one-half of this figure by the number of overtime hours worked in the week. A shorter method of obtaining the amount of additional overtime compensation due is to multiply the amount of commission allocable to the week by the decimal equivalent of the fraction.

Overtime hours

——————–

Total hours × 2

A coefficient table (WH-134) has been prepared which contains the appropriate decimals for computing the extra half-time due.

Examples: (i) If there is a monthly commission payment of $416, the amount of commission allocable to a single week is $96 ($416×12=$4,992÷52=$96). In a week in which an employee who is due overtime compensation after 40 hours works 48 hours, dividing $96 by 48 gives the increase to the regular rate of $2. Multiplying one-half of this figure by 8 overtime hours gives the additional overtime pay due of $8. The $96 may also be multiplied by 0.083 (the appropriate decimal shown on the coefficient table) to get the additional overtime pay due of $8.

(ii) An employee received $384 in commissions for a 4-week period. Dividing this by 4 gives him a weekly increase of $96. Assume that he is due overtime compensation after 40 hours and that in the 4-week period he worked 44, 40, 44 and 48 hours. He would be due additional compensation of $4.36 for the first and third week ($96÷44=$2.18÷2=$1.09×4 overtime hours=$4.36), no extra compensation for the second week during which no overtime hours were worked, and $8 for the fourth week, computed in the same manner as weeks one and three. The additional overtime pay due may also be computed by multiplying the amount of the weekly increase by the appropriate decimal on the coefficient table, for each week in which overtime was worked.

(b) Allocation of equal amounts to each hour worked. Sometimes, there are facts which make it inappropriate to assume equal commission earnings for each workweek. For example, the number of hours worked each week may vary significantly. In such cases, rather than following the method outlined in paragraph (a) of this section, it is reasonable to assume that the employee earned an equal amount of commission in each hour that he worked during the commission computation period. The amount of the commission payment should be divided by the number of hours worked in the period in order to determine the amount of the increase in the regular rate allocable to the commission payment. One-half of this figure should be multiplied by the number of statutory overtime hours worked by the employee in the overtime workweeks of the commission computation period, to get the amount of additional overtime compensation due for this period.

Example: An employee received commissions of $192 for a commission computation period of 96 hours, including 16 overtime hours (i.e., two workweeks of 48 hours each). Dividing the $192 by 96 gives a $2 increase in the hourly rate. If the employee is entitled to overtime after 40 hours in a workweek, he is due an additional $16 for the commission computation period, representing an additional $1 for each of the 16 overtime hours.

29 CFR § 778.120.

That Regulation is pretty self-explanatory, it even contains it’s own examples, so I’m just not going to get into it any further. If you have questions, call your labor lawyer which you should do every week anyway.

Sit back, fire one up and collect unemployment . . . But only if you have a card.

We interrupt our normal program for a special report on Medical Marijuana in Michigan. How’s that for an alliteration? It has been a while since we have discussed the Michigan Medical Marihuana Act, MCL 333.26421 et. seq (MMMA) and how it relates to employment. To see the last time we did, which was back in 2011, click here. And you might want to do that because we are going to talk about that court’s opinion. But first, what’s new?

Well, here is the question presented by this most recent challenge (Braska v Challenge Manufacturing) to an employee (actually three employees) termination for testing positive for marijuana (and by the way, I am going to spell marijuana with a “j” even though the Michigan Legislature insisted on spelling it with an “h”, what a bunch of squares): whether an employee who possesses a registration identification card is disqualified from receiving unemployment benefits after the employee has been terminated for failing to pass a drug test?

I know you can’t wait until the end of this post for the answer, so drum roll please, . . . Seems the answer is . . . . the employee does get unemployment benefits.

What? How can that be? After all, the U.S. District Court for the Western District of Michigan, Southern Division held that a private employer could fire an employee who had a card and who tested positive during a drug test conducted by his employer. You will recall, because you read it right here, that Judge Jonker stated: “The fundamental problem with Plaintiff’s case is that the MMMA does not regulate private employment. Rather, the Act provides a potential defense to criminal prosecution or other adverse action by the state.”  Judge Jonker went on to note that the employee’s public policy argument would “confer on medical marijuana patients, rights, to this point conferred only on a select group of people based on immutable characteristics like race, sex and religion.”  Judge Jonker stated:  “Further, the MMMA does not indicate a general policy on behalf of the State of Michigan to create a special class of civil protections for medical marijuana users.” You can see the opinion here. Plus, the Michigan unemployment statute disqualifies people for benefits under § 29(1)(m) for “testing positive on a drug test, if the test was administered in a nondiscriminatory manner.” Isn’t that what happened here? The employees tested positive on a drug test administered in a nondiscriminatory manner.

So what’s up with that? How come an employer has the right to fire the employee, the statute disqualifies them from getting benefits, but the employee can still get unemployment compensation?

Here is what the Michigan Court of Appeals said: First, the court noted that the MMMA has a broad preemption provision which says:

 … ‘[a]ll other acts and parts of acts inconsistent with this act do not apply to the medical use of marijuana as provided for by this act.’

So that disqualifier in the unemployment statute, yeah, it does not matter if the employee has a card and is not otherwise violating the MMMA by, for example, “being under the influence at work” or “using at work.”

Second, the court noted that the MMMA says that people with cards who are using marijuana in accordance with the MMMA:

… ‘shall not’ . . . (2) be denied any ‘right’ or ‘privilege,’ ‘including but not limited to civil penalty or disciplinary action by a business or occupational or professional licensing board or bureau. . . .

And the court held:

 Applying this definition to the present case, we conclude that denial of unemployment benefits under § 29(1)(m) constitutes a ‘penalty’ under the MMMA that was imposed upon claimants for their medical use of marijuana.

So, the summary is that the MMMA trumps the unemployment act and denying unemployment benefits just because of a positive test for someone who properly has a card is a penalty imposed by the state in violation of the MMMA.

But what about the Casias case? Well the court dealt with that too. First they basically said Casias is not binding on the Michigan Court of Appeals because this is a question of Michigan law and Casias was a federal case. Then the court noted:

Moreover, unlike in Casias, in this case, we are not presented with the issue of whether the MMMA’s immunity clause applies in cases involving action solely by private employers.The issue raised in this case is not whether the employers violated the MMMA because they terminated claimants. The issue is whether, in denying unemployment benefits, the MCAC—a state actor—imposed a penalty upon claimants that ran afoul of the MMMA’s broad immunity clause. When an individual is denied unemployment benefits, the employer’s conduct is not at issue, but rather, the denial involves state action. See Vander Laan v Mulder, 178 Mich App 172, 176; 443 NW2d 491 (1989).

You see, ultimately the court decided that determining who gets or does not get unemployment is up to the state and not the employer and that makes Casias different.

So what does this mean for you the next time you fire someone for testing positive for marijuana? Well one thing is certain, if the employee has a medical marijuana card that was properly issued and you can’t prove the employee was using at work or under the influence at work, they are going to get unemployment benefits.

Oh, and one more thing. There are some other issues here too. Like how would this court have come down in the Casias case? Would they have agreed with Judge Jonker or gone the other way? We don’t know. We can guess, but I am not going to do that in this post. I’m not going to do it for a couple or reasons, first, we don’t know because even though the Court addressed the Casias case, that issue, can an employer fire an employee with a medical marijuana card, was not in front of them to decide. And, second, this may not be the final word on this issue. No word yet, if the state will appeal this decision to the Michigan Supreme Court. So keep your eyes open and we will too. And don’t panic, . . . yet.

The regular rate and commissions. Part 3.

Remember last week we had another cliff hanger and I left you with trying to figure out how you compute the regular rate for an employee who is paid commissions that can’t be allocated to a specific workweek. All right, who read ahead? Come on admit it, this was just so exciting you couldn’t wait to find out, now could you? Admit it! Well if you didn’t read ahead, here is what the Regulation says:

If it is not possible or practicable to allocate the commission among the workweeks of the period in proportion to the amount of commission actually earned or reasonably presumed to be earned each week, some other reasonable and equitable method must be adopted. The following methods may be used:

(a) Allocation of equal amounts to each week. Assume that the employee earned an equal amount of commission in each week of the commission computation period and compute any additional overtime compensation due on this amount. This may be done as follows:

(1) For a commission computation period of 1 month, multiply the commission payment by 12 and divide by 52 to get the amount of commission allocable to a single week. If there is a semimonthly computation period, multiply the commission payment by 24 and divide by 52 to get each week’s commission. For a commission computation period of a specific number of workweeks, such as every 4 weeks (as distinguished from every month) divide the total amount of commission by the number of weeks for which it represents additional compensation to get the amount of commission allocable to each week.

(2) Once the amount of commission allocable to a workweek has been ascertained for each week in which overtime was worked, the commission for that week is divided by the total number of hours worked in that week, to get the increase in the hourly rate. Additional overtime due is computed by multiplying one-half of this figure by the number of overtime hours worked in the week. A shorter method of obtaining the amount of additional overtime compensation due is to multiply the amount of commission allocable to the week by the decimal equivalent of the fraction

Overtime hours

——————–

Total hours × 2

A coefficient table (WH-134) has been prepared which contains the appropriate decimals for computing the extra half-time due.

Examples: (i) If there is a monthly commission payment of $416, the amount of commission allocable to a single week is $96 ($416×12=$4,992÷52=$96). In a week in which an employee who is due overtime compensation after 40 hours works 48 hours, dividing $96 by 48 gives the increase to the regular rate of $2. Multiplying one-half of this figure by 8 overtime hours gives the additional overtime pay due of $8. The $96 may also be multiplied by 0.083 (the appropriate decimal shown on the coefficient table) to get the additional overtime pay due of $8.

(ii) An employee received $384 in commissions for a 4-week period. Dividing this by 4 gives him a weekly increase of $96. Assume that he is due overtime compensation after 40 hours and that in the 4-week period he worked 44, 40, 44 and 48 hours. He would be due additional compensation of $4.36 for the first and third week ($96÷44=$2.18÷2=$1.09×4 overtime hours=$4.36), no extra compensation for the second week during which no overtime hours were worked, and $8 for the fourth week, computed in the same manner as weeks one and three. The additional overtime pay due may also be computed by multiplying the amount of the weekly increase by the appropriate decimal on the coefficient table, for each week in which overtime was worked.

(b) Allocation of equal amounts to each hour worked. Sometimes, there are facts which make it inappropriate to assume equal commission earnings for each workweek. For example, the number of hours worked each week may vary significantly. In such cases, rather than following the method outlined in paragraph (a) of this section, it is reasonable to assume that the employee earned an equal amount of commission in each hour that he worked during the commission computation period. The amount of the commission payment should be divided by the number of hours worked in the period in order to determine the amount of the increase in the regular rate allocable to the commission payment. One-half of this figure should be multiplied by the number of statutory overtime hours worked by the employee in the overtime workweeks of the commission computation period, to get the amount of additional overtime compensation due for this period.

Example: An employee received commissions of $192 for a commission computation period of 96 hours, including 16 overtime hours (i.e., two workweeks of 48 hours each). Dividing the $192 by 96 gives a $2 increase in the hourly rate. If the employee is entitled to overtime after 40 hours in a workweek, he is due an additional $16 for the commission computation period, representing an additional $1 for each of the 16 overtime hours.

29 CFR § 778.120.

That Regulation is pretty self-explanatory, it is also very long and very boring, so I’m just not going to get into it any further. If you have questions, call your labor lawyer which you should do every week anyway.

The regular rate and commissions. Part 2.

You know, I really have to start coming up with better titles for these posts. I’m getting boring beyond belief. Could be because I have spent the better part of a year talking about the FLSA and Regulations and every time I try to do something even a bit funny I get knocked down by someone in . . . . well, let’s not go there.

Last week we talked about the really simple and admittedly very rare situation where an employee gets paid on an hourly basis with weekly commissions. But what about the less simple and more common situation where a non-exempt employee gets paid commission once a month, or once a quarter? Then what?

 If the calculation and payment of the commission cannot be completed until sometime after the regular pay day for the workweek, the employer may disregard the commission in computing the regular hourly rate until the amount of commission can be ascertained. Until that is done he may pay compensation for overtime at a rate not less than one and one-half times the hourly rate paid the employee, exclusive of the commission. When the commission can be computed and paid, additional overtime compensation due by reason of the inclusion of the commission in the employee’s regular rate must also be paid. To compute this additional overtime compensation, it is necessary, as a general rule, that the commission be apportioned back over the workweeks of the period during which it was earned. The employee must then receive additional overtime compensation for each week during the period in which he worked in excess of the applicable maximum hours standard. The additional compensation for that workweek must be not less than one-half of the increase in the hourly rate of pay attributable to the commission for that week multiplied by the number of hours worked in excess of the applicable maximum hours standard in that workweek.

29 CFR § 778.119. So what you are doing here is getting the commission total on a, say, monthly or quarterly basis. Figure out how much of the commission was earned in each week of whatever period is covered, then you recalculate the regular rate for each week and pay the employee an additional amount equal to one-half of the increase in the regular rate for all of the overtime hours worked in that week. Not that bad, right? But you can only use this method when you can actually allocate the commission to a workweek in which it was earned.

So what do you do when you can’t apportion the commission to a specific workweek? Seems like in a lot of industries that would be the more common situation. Well, that is a really long Regulation and it even has examples, so we will do it next week.

The regular rate and commissions. Part 1.

What is a commission? We all know what a commission is, right? According to Webster, a commission is “a fee paid to an agent or employee for transacting a piece of business or performing a service; especially: a percentage of the money received from a total paid to the agent responsible for the business.” http://www.merriam-webster.com/dictionary/commission

Wiki defines it as “a form of payment to an agent for services rendered.” http://en.wikipedia.org/wiki/Commission.

So now that we know what a commission is, the next logical question is, can you even pay a non-exempt employee a commission? Of course you can, it may not happen much, but you can. You just have to make sure you follow the other rules: That the employee makes at least the minimum wage and that the employee gets time and one-half of the regular rate for all hours worked over 40 in the workweek. And that is what we have been dealing with since the beginning of the year. Right? Right. So how do you determine what the regular rate is when you pay a non-exempt employee a commission? Well, like a bunch of the other rules we have been talking about, there is a general rule and then a couple of more specific rules that tell you exactly how to do that.

Here is the general rule:

Commissions (whether based on a percentage of total sales or of sales in excess of a specified amount, or on some other formula) are payments for hours worked and must be included in the regular rate. This is true regardless of whether the commission is the sole source of the employee’s compensation or is paid in addition to a guaranteed salary or hourly rate, or on some other basis, and regardless of the method, frequency, or regularity of computing, allocating and paying the commission. It does not matter whether the commission earnings are computed daily, weekly, biweekly, semimonthly, monthly, or at some other interval. The fact that the commission is paid on a basis other than weekly, and that payment is delayed for a time past the employee’s normal pay day or pay period, does not excuse the employer from including this payment in the employee’s regular rate.

29 CFR § 778.117. So it is simple, right? You have to include commissions in the total compensation earned by the employee and then you just do some division and figure out what the regular rate is. And if the commissions are earned on a weekly basis, it is really that simple.

When the commission is paid on a weekly basis, it is added to the employee’s other earnings for that workweek (except overtime premiums and other payments excluded as provided in section 7(e) of the Act), and the total is divided by the total number of hours worked in the workweek to obtain the employee’s regular hourly rate for the particular workweek. The employee must then be paid extra compensation at one-half of that rate for each hour worked in excess of the applicable maximum hours standard.

29 CFR §778.118. So if the employee makes $10 per hour and works 50 hours he gets $500 in hourly wages and he makes an additional 5% on all sales for that week, and if he sells $1,000 worth of widgets, he makes an additional $50 in commissions. So the total is $500 plus $50 which is $550 divided by 50 hours or a regular rate of $11 per hour. Then he gets half-time or an additional $5.50 for all the overtime hours. (Remember, he has already been paid the straight time rate for those hours). (See how I made that math really easy. . . . know why? Cause I hate math). Now that is really simple, and it can’t possibly be that simple, can it? Sure it can, if you pay commissions on a weekly basis. And how many employers do that? Not many. So next week we talk about deferred commissions.

Does anybody really do this anymore? Non-Cash Payments and the regular rate.

Back in April we did a post on payments under the FLSA and I put a link in to a song called 16 Tons. It is an old song about an employee who can’t quit his job because he owes the company store more than he makes. Hard to believe isn’t it? That you could work your tail off and end up owing the company more than they owe you. But back in the olden days, and trust me, given my age, when I say olden days I mean olden days, some companies provided more than just pay to their employees. For those of you who are not into history or who are a bit younger, Wiki defines company town as:

A company town is a place where, at least initially, practically all stores and buildings are owned by the one joint-stock company that has a geographically-linked business need and so provides employment and infrastructure (housing, stores, transportation, sewage and water) to support the effort. Typically, such towns are founded in a remote location, so that residents cannot easily commute or shop elsewhere, . . . .”

See http://en.wikipedia.org/wiki/Company_town

The Encyclopedia of Chicago states:

The most ambitious and controversial project of company housing was conceived by railroad car magnate George M. Pullman, who in 1880 founded the town of Pullman on Chicago’s southern suburban fringe. As part of Pullman’s paternalistic social vision, his housing was designed to foster in workers the virtues of industriousness, temperance, thrift, and cleanliness. All dwellings, from the bachelor apartments to the free-standing houses, featured running water, gas, and garbage disposals. The Pullman companies maintained total control over housing: they owned the land and buildings, set the rents, screened (and evicted) tenants.

See http://www.encyclopedia.chicagohistory.org/pages/324.html

So why on earth am I telling you all of this. Because I like history. And because there is actually a regulation that deals with this sort of thing.

Where payments are made to employees in the form of goods or facilities which are regarded as part of wages, the reasonable cost to the employer or the fair value of such goods or of furnishing such facilities must be included in the regular rate. (See part 531 of this chapter for a discussion as to the inclusion of goods and facilities in wages and the method of determining reasonable cost.) Where, for example, an employer furnishes lodging to his employees in addition to cash wages the reasonable cost or the fair value of the lodging (per week) must be added to the cash wages before the regular rate is determined.

29 CFR § 778.116.

So, if you provide housing to your non-exempt employees as part of their compensation, you have to include the fair market value of that housing when you are calculating the regular rate for that employee and figuring the resulting overtime rate. And that is that. Oh by the way, if you are thinking nobody provides housing to workers anymore, think again. In fact it is so common for migrant farm workers that many states, including Michigan, have licensing requirements for providing housing. See http://michigan.gov/mdard/0,4610,7-125-1569_45168—,00.html

Next week we start talking about commissions and the regular rate.

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