If your business sells products or services, it is likely that you have at least one inside salesperson who earns commissions on the sales that the inside salesperson makes. If this inside salesperson has the potential to earn a decent amount in commissions, your company may have classified this salesperson as an exempt commissioned employee. This means that you are not paying this person overtime pay for overtime hours worked. If this is the case, you may be incorrectly paying your inside salesperson and exposed to a potential claim for wage theft.
Exempt vs Non-Exempt Classification
Certain commissioned inside sales employees may be exempt from overtime pay in California if the employee earns more than one-and-a-half times the minimum wage each workweek, and more than half of the employee’s compensation represents commission earnings. (Outside salespeople do not need to meet the minimum salary requirements.) The calculation on the second prong could get complicated where the employee gets a draw on commissions.
In addition to the two prongs, in order for an inside salesperson to be exempt from overtime pay, a court decision (Peabody v. Time Warner Cable) noted that the two prongs must be met each pay period. This means that in pay periods where the employee is not paid any commissions or the commissions do not amount to more than 1.5 times the minimum wage, the employee is entitled to overtime. Thus, if there are two paid periods in one month, it is possible that the employee would be non-exempt in one pay period and entitled to overtime pay, while meeting the exemption requirement in the next pay period and does not have to be paid overtime.
Calculating Overtime Pay
The other complication that businesses face with paying an inside salesperson who received commissions is how to calculate overtime pay in the periods where they don’t meet the exemption under California’s overtime rules. Overtime pay is calculated based on the “regular rate of pay,” which is the amount of wages earned divided by the number of hours worked, including overtime hours. Where employees are not paid an hourly rate and is instead paid commissions, or a combination of commissions and a salary, the regular rate of pay could fluctuate from pay period to pay period.
Why This Matters
Companies that fail to pay employees correctly face a significant risk of being sued for wage theft. These lawsuits are expensive because employers will not only have to pay the wages due to the employee, but may also have to pay tens or hundreds of thousands of dollars in penalties and attorney’s fees. Additionally, litigation diverts your company’s human and monetary resources away from growing your business. Thus, regardless of whether your business has the ability to absorb the monetary losses, failure to correctly pay your employees will hinder your business’s growth.
Learn more about paying commissions.
Schedule a call if you are unsure whether your business is paying employees correctly.
Please read our disclaimer.