Tuesday, April 20, 2010

Do you know? Overtime for non-exempt commissioned employees

Only a small subset of commissioned employees are exempt from the Fair Labor Standards Act’s overtime provisions. For the majority of employees who are paid wholly or in part by commissions, the FLSA presents a complicated calculus of rules and regulations that employers must follow to properly account and pay overtime premiums for hours worked in excess of 40 in any workweek.

The key question for for commissioned employees is how one computes the “regular rate of pay” for purposes of calculating the proper overtime premium to apply to commissions paid.

If a commission is paid on a weekly basis, the calculation is fairly basic. The commission is added to any other earnings for that workweek. The total is then divided by the number of hours worked during that week to obtain the employee’s regular rate for that particular workweek. The employee must then be paid overtime compensation of one-half of that rate for each hour worked in excess of 40 for that week.

It gets more complicated, however, If the calculation and payment of the commission cannot be completed until sometime after the regular pay day for the workweek. In the case, the employer may disregard until later the commission in computing the regular hourly rate and pay overtime exclusive of the commission. However, when the commission is ultimately paid, the employer has to go back and recalculate the overtime premium for each workweek covered by the deferred or delayed commission payment. The employer must apportion the commission 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 40 hours.

It gets even more complicated if it is not possible or practicable to allocate the
commission among the workweeks per the amount of commission actually earned or reasonably presumed. In this case, the Department of Labor permits employers to choose from one of two different methods fairly and equitably account for overtime premiums.

1. Allocation of equal amounts each week. Under this method, the employer will assume that the employee earned an equal amount of commission for each week of the period covered, and compute any additional overtime compensation based on that pro rata amount. For example:

  • For a commission paid monthly, multiple the commission by 12 and divide by 52 to obtain the amount attributable for each week of that month.
  • For a commission paid semi-monthly, multiply by 24 and divide by 52.
  • For a commission that covers a specific number of workweeks, divide the total commission paid by the number of weeks it covers.

Once the pro rata weekly commissions is determined, simply divide that amount by the total number of hours worked to obtain the increase in the hourly rate. The employee is then owed one-half of that increase for each hour worked in excess of 40 for a given week.

2. Allocation of equal amounts to each hour worked. Sometimes,
there are facts which make it inappropriate to assume equal commission
earnings for each workweek (such as when the number of hours worked each
week varies widely). In such cases, the employer can assume that the employee earned the same amount of commission for each hour worked during the computation period. The total commission payment should be divided by the total number of hours to determine the amount of the increase in the regular rate. To determine the amount of additional overtime compensation owed for the period, multiply one-half of the figure by the total number of overtime hours worked by the employee for all workweeks during the covered period.

Clear enough for you? Is it any wonder that companies get themselves in trouble with wage and hour issues?

Presented by Kohrman Jackson & Krantz, with offices in Cleveland and Columbus. For more information, contact Jon Hyman, a partner in our Labor & Employment group, at (216) 736-7226 or jth@kjk.com.