Highly Compensated Exemption May Not Work on Commission Based Pay - American Society of Employers - Michael Burns

Highly Compensated Exemption May Not Work on Commission Based Pay

Imagine an employee that is paid close to a million dollars annually, is non-exempt, and therefore entitled to time and one-half on top of their six figure pay. Possible? A federal court in Tennessee says yes. The Plaintiffs in this case were employees paid as commission based sales representatives. They earned well over $100,000 per year, and in some years the most successful sales representatives earned over $900,000.

So why were these positions still entitled to overtime? Wouldn’t they fall under the Highly Paid Exemption? How come they don’t fall under the Outside Sales Exemption? These sales representatives were not outside sales positions and therefore did not qualify for that exemption. They did make over the $100,000 criteria that could put them in the Highly Paid exempt classification. But the Court did not find they could  be exempt under that criteria either. So what made these employees non-exempt?

If not falling under the Outside Sales or Computer Professional exemptions the employee would most likely have to fall under one of the other primary Wage and Hour exemptions. These are the Executive, Professional, or Administrative exemptions. To be exempt under one of those three classifications the employee must meet three tests:

  Salary Basis – Must be paid on a salary basis (weekly, semi or bimonthly, monthly)

Salary Level – Paid at least $455/wk. (still the legal salary level – arguably despite the current rules debacle)

Job Duties - Must meet the exemptions job duties test(s)

            OR

Be paid in excess of $100,000/yr. (This salary level also remains until the US Department of Labor fixes its rules). And perform office or non-manual work. And customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee.

The federal district court was asked to determine if commissions can be considered a salary or pursuant to the regulations could be considered a “fee.”  The second question reviewed by the Court was whether pay by commission can be applied pursuant to the Highly Paid classification exemption.  By its interpretation of the regulations and what is salary, the court determined the method of payment was not a salary and also could not be defined as a fee. But why not a fee? The court looked to another regulation defining what a fee is and found under 29 C.F.R. § 541.605:

(a)    Administrative and professional employees may be paid on a fee basis, rather than on a salary basis. An employee will be considered to be paid on a “fee basis” within the meaning of these regulations if the employee is paid an agreed sum for a single job regardless of the time required for its completion. These payments resemble piecework payments with the important distinction that generally a “fee” is paid for the kind of job that is unique rather than for a series of jobs repeated an indefinite number of times and for which payment on an identical basis is made over and over again. Payments based on the number of hours or days worked and not on the accomplishment of a given single task are not considered payments on a fee basis.

But the Court ruled, the fee rule only applied to the administrative and professional classifications, not the executive classification that the employer was arguing this position fell under.  And to add salt to the plea wound, the Court stated even if they had tried to argue the fee definition should apply to the executive exemption the Court still did not see commissions the same as a fee.

 

Employers that pay on commission need to not only understand the value of their pay plan but also the potential FLSA classification implications.

 

 

Sources: Big Commissions & FLSA Omissions: How Employers Could Be Required to Pay Six-Figure Earners Overtime Wages, Wage & Hour Litigation Blog Seyfarth Shaw LLP  (11/7/2017); JESSEE PIERCE and MICHAEL PIERCE v. WYNDHAM VACATION RESORTS, INC., et al., (No. 3:13-CV-641-CCS)

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