Yes, a W-2 employee can be paid entirely on commission. Federal law doesn’t ban the arrangement, but it imposes a floor the employer has to clear every single workweek: the employee’s commission earnings must equal at least the federal minimum wage of $7.25 per hour for every hour worked, and if commissions fall short, the employer owes the difference.1U.S. Department of Labor. Minimum Wage That rule, plus overtime obligations and standard tax withholding, is what makes “commission-only” a workable pay structure in some roles and a legal minefield in others.
The Minimum Wage Floor Applies Every Week
Every covered, non-exempt employee is entitled to at least the federal minimum wage for all hours worked in a workweek.2Office of the Law Revision Counsel. 29 USC 206 – Minimum Wages Commission-only employees are no exception. If a salesperson works 45 hours and earns $200 in commissions, the employer owes whatever it takes to bring that paycheck up to 45 hours at minimum wage. “Better luck next week” isn’t a legal option.
States with higher minimum wages override the federal rate. In a $15-per-hour state, the gap an employer has to fill during a slow week is much larger. That economic reality is why pure commission-only plans tend to work in high-earning sales roles, where the floor is rarely in play, and tend to backfire in entry-level positions where lean weeks are predictable.
Overtime Still Applies Unless an Exemption Fits
Non-exempt employees normally earn time-and-a-half for hours past 40 in a workweek.3U.S. Department of Labor. Overtime Pay Commission-only pay doesn’t change that by itself. Two FLSA exemptions commonly come into play for commissioned workers, and both have strict conditions.
Section 7(i): Retail and Service Establishments
Section 7(i) exempts certain commissioned employees of retail or service establishments from overtime if three conditions are met in every workweek with overtime hours:4U.S. Department of Labor. Fact Sheet 20 – Employees Paid Commissions By Retail Establishments Who Are Exempt Under Section 7(i) From Overtime Under The FLSA
- The employee works for a retail or service business.
- The regular rate of pay for the workweek exceeds one and one-half times the applicable minimum wage. At the federal rate, that means more than $10.875 per hour.
- Over a representative period of at least one month, more than half of the employee’s total compensation comes from commissions.5Office of the Law Revision Counsel. 29 USC 207 – Maximum Hours
If any one condition fails in a given week, the exemption fails for that week and overtime is owed. Employers relying on 7(i) need to track the thresholds continuously, not just assume “most weeks” is good enough.
Outside Sales
Outside sales employees are exempt from both minimum wage and overtime under 29 CFR 541.500 if their primary duty is making sales and they customarily work away from the employer’s place of business.6eCFR. 29 CFR 541.500 – General Rule for Outside Sales Employees Unlike most FLSA exemptions, this one has no salary threshold, so a qualifying outside rep can be paid 100% on commission with no minimum wage floor to clear.
The exemption turns on where the selling happens. A salesperson making calls from a cubicle doesn’t qualify, even on pure commission. Incidental office tasks like writing reports or updating catalogs don’t disqualify someone, but once the inside work starts dominating, the exemption erodes.7U.S. Department of Labor. Fact Sheet 17F – Exemption for Outside Sales Employees Under the Fair Labor Standards Act
Calculating Overtime When No Exemption Applies
When neither exemption fits, overtime is owed, and the math works differently than for hourly staff. For a commission employee paid on a workweek basis, the regular rate is total earnings divided by total hours worked that week. The overtime premium is an additional half-time on that regular rate for each hour past 40.8eCFR. 29 CFR 778.118 – Commission Paid on a Workweek Basis
Example: a salesperson works 50 hours and earns $1,000 in commissions. The regular rate is $1,000 รท 50 = $20 per hour. The overtime premium is $10 (half of $20) for each of the 10 overtime hours, adding $100. Total pay: $1,100. The commissions already cover every hour, so only the half-time premium is layered on top.
When commissions are calculated monthly or quarterly rather than weekly, the employer has to allocate the commission back to the individual workweeks it was earned in before computing overtime. Getting that allocation wrong is one of the more common FLSA violations in commission workplaces.
Draws Can Smooth Out the Floor Problem
A draw is an advance against future commissions. The employer pays a set amount each pay period, and once commissions exceed that amount, the advance is repaid out of future earnings. Draws are the practical bridge most employers use to keep commission-only employees above the minimum wage floor during slow stretches.
Recoverable draws create a running balance the employee owes back from future commissions. Earn $3,000 in commissions after a $1,000 draw month, and the employer deducts the $1,000 before paying out the remaining $2,000. Non-recoverable draws function more like a guaranteed minimum: the employee keeps the money regardless of future sales.
The FLSA question is whether the draw keeps the effective hourly rate at or above minimum wage every workweek. Recoverable draws are generally lawful as long as the employer recovers only from future earned commissions. Federal regulations require wages to be paid “free and clear,” so an employer can’t claw back a draw from a paycheck already delivered. The deduction has to come from commissions not yet paid.
Tax Withholding Works the Same as Any W-2 Wages
Commission payments to W-2 employees are subject to the usual withholding: federal income tax, Social Security, and Medicare.9Internal Revenue Service. Tax Withholding For federal income tax, when commissions are identified separately from regular wages, the IRS allows two methods: withhold a flat 22% from the commission, or combine the commission with regular wages for the pay period and withhold using the standard tables. Supplemental wages above $1 million in a calendar year are withheld at 37% on the excess.10Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide For most commission-only employees, the flat 22% method is simpler because there’s no regular wage to combine with.
State income tax withholding applies wherever the state imposes one. Commissions are reported on Form W-2 alongside all other wages.
Written Commission Agreements
Federal law doesn’t require a written commission agreement. A number of states do, typically requiring the employer to spell out how commissions are calculated, when they’re earned, and when they’ll be paid, often including what happens to unpaid commissions after separation.
Even where no law requires it, a written agreement is the best protection against disputes. Commission plans involve variables that hourly pay doesn’t: what counts as a qualifying sale, whether returns reduce the commission, how team sales split, and whether commissions survive termination. Oral promises and implied understandings tend to end badly for the employer in court.
Commission Pay Alone Doesn’t Make Someone a Contractor
Paying a worker entirely on commission does not convert them into an independent contractor. The IRS looks at behavioral control, financial control, and the nature of the relationship when deciding classification.11Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor The Department of Labor applies a separate six-factor economic reality test under the FLSA focused on whether the worker is economically dependent on the employer or genuinely in business for themselves.12U.S. Department of Labor. Employment Relationship Under the Fair Labor Standards Act
If the employer sets the schedule, assigns the clients, supplies the leads, and the worker has no real opportunity to build an independent business, the worker is an employee no matter how they’re paid. Compensation method is one factor, and rarely the decisive one.
What’s at Stake If the Rules Are Missed
FLSA violations on minimum wage or overtime make the employer liable for the unpaid wages plus an equal amount in liquidated damages, effectively doubling the back-pay bill. Employees who sue can also recover attorney’s fees and court costs.13Office of the Law Revision Counsel. 29 USC 216 – Penalties Willful or repeated violations trigger additional civil money penalties, and willful violations can even bring criminal fines up to $10,000, with a second conviction carrying up to six months of imprisonment.14U.S. Department of Labor. Fair Labor Standards Act Advisor – Enforcement Under the Fair Labor Standards Act
Claims reach back two years from the violation, or three years if the violation was willful.15Office of the Law Revision Counsel. 29 USC 255 – Statute of Limitations An employer who has been underpaying overtime on commissioned staff could be looking at three years of back pay plus three years of liquidated damages for every affected worker. State labor agencies can pile on their own penalties, and audits that start with one complaint often turn up related problems in tax withholding or workers’ compensation.
If you’re running or working under a commission-only plan, the practical checklist is short: confirm the effective hourly rate clears the applicable minimum wage each workweek, verify the overtime math (or verify that a 7(i) or outside sales exemption actually fits every week), get the commission terms in writing, and keep detailed records of hours, commission calculations, and classification decisions.