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Pay Rules: Commissioned & Tipped Employees

Do you pay your employees a commission or do they receive tips? If so, you need to consider rules related to minimum wage, overtime, and possibly paid sick leave. Here are some helpful hints for determining whether your pay practices comply.

Commissioned Employees:

Commissioned employees receive compensation upon completion of a task, usually a certain percentage of sales made. Some employers pay commission-only whereas others pay a guaranteed hourly rate or minimum salary in addition to commissions. Employers are generally permitted to pay employees by commission provided certain other rules are satisfied.

Minimum Wage:

Most employees must be classified as non-exempt. Regardless of whether commissions are the sole source of the employee's compensation or are paid in addition to a guaranteed salary or hourly rate, the commissioned employee's compensation must generally equal or exceed the minimum wage for each hour worked, unless the employee qualifies for an exemption under the Fair Labor Standards Act (FLSA). With the exception of the outside sales employee and computer professional exemptions, generally employers must pay exempt employees a predetermined salary of at least $455 per week regardless of the quality or quantity of the work (the minimum salary requirement increases to $913 per week effective December 1, 2016).

If the commissioned employee doesn't qualify for an exemption, the employee must be paid at least the applicable minimum wage for each hour worked, whether it is from commissions, a guaranteed wage/salary, or a combination of both. To determine whether the minimum wage has been satisfied, divide the total compensation (e.g. any guaranteed wage/salary plus commissions) earned during the workweek by the number of hours worked.

Example: The applicable minimum wage is $7.25 per hour. A salesperson is paid a guaranteed hourly wage of $5 per hour and 10 percent of any sales made. One week, the employee worked 40 hours and sold $500 in services, earning the employee a $50 commission. Since the employee only earned a total of $250 over the workweek ($200 in wages plus a $50 commission), or $6.25 per hour, the employer must make up the difference for the week ($40).

Overtime:

Employees must generally be paid overtime whenever they work more than 40 hours in a workweek unless they satisfy one of the FLSA's exemptions from overtime. Some states require overtime in additional circumstances. The federal overtime rate is 1.5 times the employee's "regular rate of pay." There are also exemptions from overtime if certain tests are satisfied, including an exemption from overtime for retail sales employees (this exemption doesn't apply to the minimum wage).

If employees do not qualify for an overtime exemption, they are entitled to overtime whenever they work more than 40 hours in a workweek. Commissions must be included when determining the employee's regular rate of pay.

To determine the regular rate of pay for a commissioned employee who is also paid a guaranteed hourly rate, add the total compensation (guaranteed wage plus commissions earned) and divide by the total hours for the week. Note: The calculation can be more complicated if the employee is paid a salary.

Example: A non-exempt employee receives a guaranteed hourly wage of $10 per hour plus commissions. In one workweek, she earns $1000 in commissions and works 50 hours. For overtime purposes, the employee's regular rate of pay would be $30 per hour ($1500 total compensation divided by 50 hours).*

Note: If the calculation and payment of the commission cannot be completed until sometime after the pay period (because it is earned over several workweeks), the employer may temporarily disregard the commission in computing the regular rate of pay until the total commission can be determined. Until the commission can be determined, the employer must pay overtime at a rate no less than 1.5 times the employee's hourly rate, exclusive of the commission. When the commission can be determined, the employer must generally apportion it back over the workweeks during which it was earned and make catchup overtime payments accordingly.

Paid Sick Leave:

Some states and local jurisdictions have enacted laws requiring employers to provide paid sick leave to employees. Typically, these laws require employers to pay a commissioned employee's regular wage/salary or the minimum wage, whichever is greater, during sick leave. However, employers generally don't have to pay employees for any commissions not earned while out on leave. Check your applicable law to ensure compliance.

Tipped Employees:

Under the FLSA, tipped employees are those who customarily and regularly receive more than $30 per month in tips. Your state or local law may have a different definition of a tipped employee.

Minimum Wage:

Under the FLSA, tipped employees must be compensated at least $2.13 per hour in direct cash wages, and up to $5.12 in tips per hour can be applied toward meeting the minimum wage (known as the "tip credit"). Employers must provide certain information to employees before they can use the tip credit and may count only tips actually received by the employee in applying the tip credit. If the employee's direct cash wages and tips don't meet or exceed the minimum wage, the employer must make up the difference.

Example: The applicable minimum wage is $7.25 per hour. An employer pays a server at a restaurant $2.13 per hour in direct cash wages, and the employee also earns tips. In one workweek, the employee earns $150 in tips while working 40 hours. In this case, the employee's total compensation ($85.20 in direct cash wages + $150 in tips = $235.20 or $5.88 per hour) fails to meet the minimum wage, so the employer must make up the difference ($54.80).

Note: Some states and local jurisdictions require a higher direct cash wage for tipped employees or prohibit tip credits entirely. Check your applicable law to ensure compliance.

Overtime:

Tipped employees are generally entitled to overtime whenever they work more than 40 hours in a workweek. The FLSA doesn't require employers to include tips when determining the employee's regular rate of pay. In general, tipped employees' regular rate of pay for overtime purposes is the minimum wage or their direct cash wage (if higher than the minimum wage). Under the FLSA, employers may also apply the tip credit to overtime.

Example: A tipped employee receives a direct cash wage of $2.13 per hour and is subject to the federal minimum wage of $7.25 per hour. In one workweek, he works 50 hours and earns $800 in tips. Overtime could be calculated as follows:

Multiply regular rate of pay by 1.5:

$7.25 x 1.5 =$10.875 overtime rate (before tip credit)

Apply tip credit to overtime rate and multiply by the number of overtime hours:

$10.875 - $5.12 tip credit = $5.755 per hour overtime rate with tip credit

$5.755 per hour x 10 hours of overtime = $57.55 total overtime pay due.

Paid Sick Leave:

In the states and local jurisdictions that require employers to provide paid sick leave to employees, there is generally no requirement for employers to pay employees for tips that are not earned while out on leave. Typically, these laws require employers to pay tipped employee's their regular hourly wage or the minimum wage, whichever is higher. Check your applicable law to ensure compliance.

Conclusion:

Review and understand the federal, state, and local rules for paying your employees.

* For all of the overtime calculations in this Tip, the regular rate of pay does not include nondiscretionary bonuses, shift differentials, or other forms of compensation that must be included in the calculation when applicable.

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