Companies will sometimes take a chance on a new (or old) salesperson by allowing him/her to work on pure commission. This “eat what you kill” compensation system seemingly creates an incentive to sell with little risk to the company. But is there really little risk? There is a real and potentially expensive risk of violating the Fair Labor Standards Act (FLSA) and/or state wage hour law.
As a general principle, the FLSA requires employers to pay an overtime premium of one and a half times the employee’s regular rate for all hours worked in excess of 40 within a workweek and to also pay at least the minimum wage for all hours worked. However, the FLSA establishes certain exceptions to these requirements. If the employee does not fit within an exception, then the employer must comply with the FLSA.
What exceptions apply to commission paid employees?
In addition to navigating the restrictions imposed by the FLSA, states are permitted to (and often have) wage hour laws more restrictive than the FLSA. In other words, an exemption under the FLSA will not necessarily constitute an exemption under state overtime and minimum wage laws.
Even though successful commission paid employees often are the highest compensated employees, companies can face huge liabilities for paying only commissions to employees who do not qualify under one of the three narrow exemptions. It is therefore never a bad idea for employers compensating employees on any commission basis – and especially for employees on a pure commission basis – to double check whether they are satisfying the FLSA’s minimum wage and overtime requirements for those employees if those requirements apply.