Employers and employees beware. Employers often assume that if employees are paid on a commission basis, they are not entitled to overtime. In reality, in order for an employee to avoid paying overtime to an employee, the employee must be paid on a "salary basis." That means that each pay period the employee must receive a predetermined amount constituting all or part of the employee’s pay and that amount cannot be subject to reduction because of variations in the quality or quantity of the work done. Commissions, by definition, fluctuate based on performance of an employee and are not a salary. Here is an example of how overtime payments to a commission-based employee might work:
Suppose the employee makes $1,000 in commissions during one week and works 45 hours that week. To know the amount of overtime owed, the employee must first determine the “regular rate” of pay by dividing the employee’s total compensation ($1,000) by the number of hours worked (45). This equals $22.22 per hour. The law presumes that the employee has then been paid the regular rate of $22.22 per hour for 45 hours. However, for the 5 hours worked over 40, the employee is entitled to time-and-one-half the regular rate, or an additional $11.11 per hour for each of those 5 hours. So, the total compensation for that week should be $1,055.55.
The bottom line is that employees who are paid on commissions alone are probably entitled to overtime pay.
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