There is an “Commission Sales” overtime exemption under Fair Labor Standards Act, 29 USC Section 207(i)… but are those payments really “commissions”?
Under Section 207(i) commission sales employees are exempt from overtime requirements, but only if:
- the regular rate of pay of such employee is in excess of one and one-half times the federal minimum hourly rate (1.5 x 7.25/hr) , and
- more than half their compensation for a representative period (not less than one month) represents commissions on goods or services. 29 U.S.C. 207(i).
There are plenty of people that work under phony “commission plans” who actually should receive overtime pay at time and a half for their hours over 40. Employers try to get away with it because “commission” is not defined in the law, so they try to call anything earned a “commission.” To be meaningful, “commissions” should mean two things: (1) compensation proportionate to the value of the sale made, and (2) compensation based on making the sale, not merely providing the service or labor related to the sale. Without this distinction, there is no meaning to the overtime pay required by the piece rate model adopted by statute and regs. Any employer could call the per-bushel rate paid to a farmhand, or the per-installment of a cable worker, a “commission,” and the piece rate/day rate overtime protections of the law would cease to have meaning.
In one recently filed BW case, the plaintiff alleges the defendant Belle Tire unlawfully withheld overtime pay to its alignment technicians based on a phony commission system. The alignment technicians earn a flat rate per-oil-change or per-alignment regardless of how much the end customer pays. Many alignment technicians worked under this flat-rate system for years. They were issued “commission reports” each week — without any overtime pay. [view the Schmitt v. Belle Tire Lawsuit Complaint]. The Court ordered notice be sent to the class of eligible Belle Tire alignment technicians, and over 60 have opted-in to pursue their claims.
This type of system does not qualify for an exemption to the legal requirement to pay overtime. For instance, in Osterman v. Gen. R.V. Ctr., Inc.,[1] the plaintiff worked as a pre-delivery inspection technician for the defendant. The defendant in Osterman paid the technicians under a flat rate system and calculated pay by multiplying an hourly rate by the number of flat rate hours (a/k/a “flag hours”) for a particular assignment. Although the defendant alleged that its flat rate system was a commission, the Court concluded that “a flat rate system of compensation…constitutes a commission if, and only if, the wages paid to a flat-rate employee are somewhat proportional to the charges passed onto the customer” and that the defendant had “not met its burden of proof that its system of compensation qualifies as a commission within the meaning of Section 207(i) of the FLSA.” The Osterman court found that no reasonable jury could find that the defendant’s pay system was “commission” under 29 U.S.C. 207(i) because “uncontested evidence exists that undermines any notion of a proportional relationship between employee compensation and customer price, either overall or for labor alone.”
What if I am not paid by the hour, am I still entitled to overtime pay under the FLSA?
Absolutely, yes. Unless some other exemption applies, day-rate and piece-rate employers are still required to pay time and a half for overtime. Read our prior post on day-rate worker lawsuits. If an employee is paid a set amount based on the task performed or the day, that does not make them exempt from the requirement to pay overtime. Workers paid per piece or per unit of work, or per day of work, are still owed time and half for those hours over 40 in a week. To calculate the overtime due, the employer is required under federal labor regulations to divide the total weekly compensation by the number of hours worked to calculate the employees’ hourly rate, then multiply that by .5 to come up with the overtime premium earned.
What if I am Owed Legitimate Commissions under a Contract?
For commissioned sales people working under a bona fide commission plan, the Fair Labor Standards Act does not provide any protections. However, many states have laws that require prompt payment of commissions and provide for other penalties. Also, a commission contract is a contract. Therefore, traditional remedies for breach of contract are also generally available to salespeople who are owed commissions.
In Michigan, the Sales Representative Commission Act (SRCA) requires commissions for the sale of goods to be paid when due according to the terms of an agreement between the principal and the sales representative. If there is no contract between the parties, the past practice between the parties determines when commission is due. An oral agreement between parties is sufficient to enforce rights under the SRCA. See Linsell v Applied Handling, Inc,[2]. If the failure to pay the commission when due was intentional, the employer is liable for additional damages equal to two times the amount of actual damages, subject to a $100,000 maximum cap.
Whether you are wondering about your overtime rights or trying to collect on an unpaid commission, there is no substitute for individual legal advice. For questions regarding the content of this post, you can contact the authors at Blanchard & Walker PLLC.
[1] Osterman v. Gen. R.V. Ctr., Inc., No. 19-10698, 2020 U.S. Dist. LEXIS 213497, at *2-3 (E.D. Mich. Nov. 16, 2020) (Dawkins Davis, D.J.) (interlocutory appeal rejected, 6th Circuit, March 31, 2021).
[2] Linsell v Applied Handling, Inc, 266 Mich App 1, 11–12, 697 NW2d 913 (2005); see also Ramirez v IBM, 829 F Supp 2d 555, 563 (ED Mich 2011)
