When a non-exempt employee earns commissions, overtime pay calculations under the Fair Labor Standards Act follow a specific sequence: add the commission to the week’s other wages, divide by hours worked to find the regular rate, and pay an extra half of that rate for every hour over 40. The commission raises the effective hourly rate, which raises the overtime premium. Paying time-and-a-half on the base hourly wage alone underpays the employee and creates back-pay liability that doubles under federal liquidated-damages rules.1Office of the Law Revision Counsel. 29 USC 216 – Penalties
The Weekly Calculation, Step by Step
The “regular rate” is not the hourly wage the employee was hired at. It is total compensation for the workweek divided by total hours worked that week.2eCFR. 29 CFR 778.117 – Commission Payments General Because commissions vary, the regular rate has to be recalculated every workweek. Not monthly, not quarterly, not whenever it seems convenient.
Take an employee who earns a $600 base wage plus $200 in commissions during a week they work 50 hours. Total compensation is $800. Divide by 50 hours and the regular rate is $16 per hour. That $16 is the number that drives the overtime premium.
Here is where most employers stumble. When an employee already earns an hourly wage plus commissions, the wages and commission together have already paid the employee at straight time for all 50 hours, including the 10 overtime hours. What is still owed is the extra half-time. Multiply the regular rate by 0.5, then multiply by overtime hours: $16 × 0.5 × 10 = $80.3eCFR. 29 CFR 778.118 – Commission Paid on a Workweek Basis
The employee’s full pay for that week is $800 plus the $80 overtime premium, for a total of $880. The following week, with different commission earnings, the regular rate and the premium will both come out different.
When the Commission Is Paid Monthly or Quarterly
Commissions paid on any cycle longer than a workweek create an extra step. The employer cannot lump the full commission into the week the check is cut. Instead, the commission has to be allocated back across the workweeks in which it was earned, and the regular rate for each of those weeks recalculated.4eCFR. 29 CFR 778.120 – Deferred Commission Payments Not Identifiable as Earned in Particular Workweeks
The simplest permitted method is equal allocation. A $1,200 quarterly commission earned over 12 weeks becomes $100 per week. That $100 is added to the wages already paid in each of those weeks, and a new regular rate is computed for each. For any week the employee worked more than 40 hours, the employer owes an additional half-time premium at the new, higher rate.5eCFR. 29 CFR 778.119 – Deferred Commission Payments
The regulation also allows allocation in proportion to the commission actually earned or reasonably presumed to be earned each week, when that is practicable.4eCFR. 29 CFR 778.120 – Deferred Commission Payments Not Identifiable as Earned in Particular Workweeks The employer may wait to run the calculation until the commission amount can be pinned down, but once it can, the additional premium has to be paid, even if the underlying paychecks for those weeks have already been cashed.
Commission-Only Employees
If commissions are the employee’s only form of pay, with no hourly wage at all, the math changes. The employer must pay 1.5 times the regular rate for every hour over 40, not just an extra half, because no base wage has covered straight time for those hours.6Office of the Law Revision Counsel. 29 USC 207 – Maximum Hours Most commission arrangements include some base pay, so the half-time method is what employers run week after week. But the pure-commission variation matters when it applies.
Which Commissions Have to Be Included
Federal regulations separate pay the employer promised in advance from pay the employer decides to hand out after the fact with no prior commitment. Nearly every commission falls into the first category. A written commission plan, a quota, a percentage-of-sales formula, or any structure the employee knows about before doing the work makes the commission non-discretionary, and non-discretionary payments go into the regular rate.7eCFR. 29 CFR 778.211 – Discretionary Bonuses
A truly discretionary commission would require the employer to decide both whether to pay and how much, at or near the end of the pay period, with no prior promise. The moment a commission structure is announced, even verbally, the payment stops being discretionary. In practice, discretionary commissions are almost nonexistent. Non-discretionary bonuses, such as an attendance bonus or a production bonus, get folded in the same way. The label does not matter; what matters is whether the employee had reason to expect the payment before doing the work.
When Overtime Is Not Owed at All
Two exemptions can remove commission-earning workers from overtime coverage entirely, and both are narrower than employers often assume.
Section 7(i) Retail and Service Exemption
Under Section 7(i), an employer does not have to pay overtime if two conditions are met at the same time: the employee’s regular rate for the representative period exceeds 1.5 times the applicable minimum wage, and more than half of the employee’s total compensation during a representative period of at least one month comes from commissions.6Office of the Law Revision Counsel. 29 USC 207 – Maximum Hours With the federal minimum wage at $7.25, the regular-rate threshold works out to $10.88 per hour. In states with higher minimum wages, the threshold rises accordingly.
The employer must also be a “retail or service establishment,” defined by federal regulation as a business where at least 75 percent of annual sales are not for resale and are recognized as retail in the industry.8eCFR. 29 CFR 779.411 – Employee of a Retail or Service Establishment Both conditions have to be tracked every representative period. A salesperson whose commissions make up only 40 percent of pay does not qualify, and neither does one whose regular rate dips below the threshold in a slow month.
Outside Sales Exemption
Employees whose primary duty is making sales or obtaining contracts, and who customarily perform that work away from the employer’s place of business, can be exempt under the outside sales rule.9eCFR. 29 CFR Part 541 Subpart F – Outside Sales Employees There is no minimum salary requirement here; the exemption turns on what the employee does and where. Sales made by phone, email, or internet from a fixed office are inside sales and do not qualify. Incidental tasks such as writing reports or attending conferences do not disqualify the employee as long as they support the field work. The job title is not what controls; the actual duties are.
The Minimum Wage Floor and Draws
Whether or not overtime applies, total compensation must meet or exceed the federal minimum wage for every hour worked. If a commissioned employee has a slow week and pay divided by hours falls below $7.25 per hour, the employer has to make up the difference.
Many commission arrangements use a “draw,” a guaranteed minimum payment reconciled later against actual commissions. Under a bona fide commission plan, all computed commissions count as commission income for purposes like the 7(i) exemption, even when they fall short of the draw in some weeks.10eCFR. 29 CFR 779.416 – What Compensation Represents Commissions But if the formula is structured so the employee almost always earns exactly the draw and rarely exceeds it, the plan is not bona fide. The draw is really a salary. State minimum wages and rules on commission timing may add further requirements on top of the federal floor.
What It Costs to Get It Wrong
An employer who underpays overtime owes the back wages plus an equal amount in liquidated damages, effectively doubling the bill.1Office of the Law Revision Counsel. 29 USC 216 – Penalties A court can reduce or eliminate liquidated damages only if the employer shows both good faith and reasonable grounds for believing it was in compliance.11Office of the Law Revision Counsel. 29 USC 260 – Liquidated Damages The Department of Labor can also impose civil money penalties up to $2,515 per violation for repeated or willful infractions.12eCFR. 29 CFR 578.3 – Types of Violations That May Result in a Penalty Prevailing employees typically also recover attorney fees and court costs.
Employees have two years to file a claim for unpaid overtime. If the violation was willful, meaning the employer knew the FLSA applied or recklessly failed to find out, the deadline extends to three years.13Office of the Law Revision Counsel. 29 USC 255 – Statute of Limitations Claims can be filed in federal or state court, and one employee can bring a collective action for others in the same situation.
Records to Keep
Employers must keep accurate records of hours worked and wages earned for every non-exempt employee.14U.S. Department of Labor. Wage and Hour Division Fact Sheet 21 – Recordkeeping Requirements Under the Fair Labor Standards Act For commissioned workers, that means documenting the commission amounts and the weekly calculation used to fold them into the regular rate. When a deferred commission is allocated back across prior workweeks, the method and the resulting overtime adjustments belong in the record too. Employees who keep their own log of hours and commission statements create an independent check, and those records become critical evidence if a claim needs to be filed.