FLSA Exemptions Update - Commission Salespeople, Executives & Overtime


 UPDATE:  11-22-2016   In a ruling Tuesday, U.S. Court Judge Amos L. Mazzant III of the Eastern District of Texas barred the U.S. from implementing the new overtime rules, saying the new revision improperly created a salary test for determining which workers fall under the Fair Labor Standards Act’s so-called “white collar” exemption.  Read the court ruling here.  This puts the following information on a temporary hold. 

On 12/1/16 a new FLSA rule by the Department of Labor will require you to either pay an exempt (salaried) employee an hourly rate along with overtime pay or increase their pay to meet the new threshold limits of $47,476.

Under the proposed rules, the minimum salary threshold would increase from $23,660 per year ($455 per week) to $50,440 ($970 per week) in 2016. The current “highly compensated employee” exemption would increase from $100,000 to $122,148 per year. According to the DOL, as many as five million American workers who are currently exempt could become eligible for overtime protection.

Guidance for Private Employers on Changes
to the White Collar Exemptions in the Overtime Final Rule

Classifying employees as exempt vs non-exempt under FLSA

Employers must carefully determine whether each worker is an employee and, if so, whether she’s exempt or non-exempt under the Fair Labor Standards Act. Incorrectly classifying a worker as an independent contractor when she’s really an employee may lead to liability for failure to pay her for hours worked (not to mention the liability for failing to withhold employment taxes).

Likewise, incorrectly classifying a non-exempt worker as exempt employee under the FLSA creates the risk of failure to pay overtime when she works more than 40 hours in a workweek.

In either case, the employer typically lacks records of the hours worked, and it’s vulnerable to claims for failure to pay for all hours worked. Be familiar with the rules concerning independent contractors and exemptions.

DOWNLOAD:  Fact Sheet #17A: 
Exemption for Executive, Administrative, Professional,
Computer & Outside Sales Employees Under the Fair Labor Standards Act (FLSA)

About Commission and bonuses

Employers will be able to count nondiscretionary bonuses, incentive payments, and commissions towards as much as 10 percent of the salary threshold beginning December 1, 2016. In order to count, these payments must be made on a quarterly or more frequent basis.
More FAQs – dol.gov

Exemptions from Overtime Pay Only

Certain commissioned employees of retail or service establishments; auto, truck, trailer, farm implement, boat, or aircraft sales workers, or parts-clerks and mechanics servicing autos, trucks, or farm implements, who are employed by non-manufacturing establishments primarily engaged in selling these items to ultimate purchasers.  Source: FindLaw.com

Because exemptions are generally narrowly defined under FLSA, an employer should carefully check the exact terms and conditions for each. Detailed information is available from local Wage-Hour offices.

Outside Sales Exemption

To qualify for the outside sales employee exemption, the employee’s primary duty must be the sale of goods or services or the rental of facilities and the employee must be customarily and regularly engaged away from the employer’s place of business.

It is this last prong — working away from the workplace — which disqualifies many commission paid employees. If the employee is an outside salesperson, the company need not pay him/her a salary or minimum wage. The typical salesperson who maintains an office at the company’s facility, but is expected to meet with customers, is not generally able to fit under the outside sales exemption. 
Source: LaborEmploymentPerspectives.com

DOWNLOAD Questionnaire/Test:
Outside Sales Exemption from Overtime Test


The federal government recognizes that employers pay commission-based salaries to enhance the productivity of their employees. Whether your employee receives commission-only salary or a combination of hourly and commission, he must receive compensation that is at least equivalent to the minimum wage. The applicable minimum wage is based on a comparison between the federal minimum wage limit--$7.25 per hour as of 2010--and the state’s minimum wage requirement; the employee is entitled to the higher of the two regulated minimum wages. Texas minimum wage laws adhere to the federally issued minimum wage requirement.

Overtime Requirements

Under certain circumstances, commission-based employees are entitled to overtime compensation. In order for your business to be exempt from paying overtime to commission-based employees, you must have a retail- or service-based business that generates at least 75 percent of its income from sales activities within an industry that is recognized as a retail sales environment. In addition, your commission-based employee must earn, at minimum, one and one-half times the minimum wage each hour. Therefore, if your commission-based employee does not earn at least the minimum overtime rate when working more than 40 hours each week, you are required to pay her the difference in earnings so her total earning is equivalent to the minimum wage, plus any applicable overtime.

To prepare for the Department of Labor’s final ruling, you will need a plan to:

  • Communicate to staff who have never recorded their time that they now have to.
    • Employee time and attendance software makes it easy for employees to report time and attendance, use mobile devices to log hours and set specific alerts that notify you when certain conditions (such as approaching overtime) require your attention.
  • Communicate to staff that they are now eligible for overtime.
  • Manage your budgets if you take a truly exempt position and increase pay to the threshold of $47,476.
  • Be proactive with any issues staff may bring because of perceived “unfairness” when they learn that co-workers just got a big increase to their level because the law said so.
  • Conduct an audit of your current employees’ statuses.
    • Determine which positions are considered exempt and who may become non-exempt.
  • Use this questionnaire from SHRM.org to test who is exempt from FSLA rules >
  • Avoid automatic time reductions
    • Many violations of the proposed FLSA regulations may be the result of unintended actions. i.e. Watch for those systems that look at an employee’s schedule and automatically deduct an hour for lunch each day based on a “standard practice”. If that employee works through lunch and doesn’t communicate it to a manager, there’s a potential risk for a future claim.

Here is a video from the US Department of Labor that talks about the "why" they have new FLSA rules and how it works:

By auditing employee configurations, investing in the right technology and developing clear communications and training plans for affected staff, you should be able to point your organization down the path toward success.

While the Department of Labor offers and extensive FAQ reference here, this would be a good time to do an extensive audit and consider the effectiveness of your sales compensation plan.

We have a free white paper you can use as a reference:

Sales Compensation Plans; Examples, Templates and Software Options” 

sales compensation plans

Other resources:

DOWNLOAD:  Fact Sheet #17F:
Exemption for Outside Sales Employees Under the Fair Labor Standards Act (FLSA)

DOWNLOAD:  Fact Sheet #17A:
Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act (FLSA)

DOWNLOAD Questionnaire - Test:
Outside Sales Exemption from Overtime Test

Guidance for Private Employers on Changes
to the White Collar Exemptions in the Overtime Final Rule


Disclaimer: This information about overtime, wages and employment law are for informational purposes only and not for the purpose of providing legal advice.

Image Source: shrm.org

Topics: Commissions Legal HR Compensation