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.