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Four common types of commissions

On Behalf of | Mar 14, 2022 | Wage & Hour Laws |

Workers in certain occupations, such as sales and marketing, can earn wages based upon how they perform or the amount of goods or services they sell. This is commonly referred to as commission pay.

The Fair Labor Standards Act (FLSA) does not require employers to pay commission, but, if they do, they must comply with the requisite wage and hour laws regarding payment and record-keeping if the employee is engaged in inside sales.

Generally, an inside salesperson is someone who makes sales by contacting prospective customers from the business’ office, phone or computer. Inside salespersons must be paid at least minimum wages and overtime, so the commissions paid must be sufficient to satisfy these requirements. Where the commissions do not cover the wage requirements of the FLSA, the employer must pay a sufficient amount to ensure that minimum wage and overtime is satisfied.

On the other hand, an outside salesperson, namely someone who primarily makes sales at the customer’s business location or home, is exempt from the minimum wage and overtime requirements of the FLSA.

Knowing the different types of commissions and how they work can help clarify wage entitlements and requirements.

1. Salary plus commission

This type of compensation provides an employee with a base salary plus a percentage of sales during a certain window of time. Typically, a base salary is contingent on a certain amount of sales, but not always. An employer may opt to include the commission together with the salary on a paystub or pay out the commission on a separate schedule. Employees who receive a combination of salary and commissions should take note of the itemizations in their paycheck to ensure they have received the proper amount. If the employee is engaged in inside sales, the time worked should be tracked and reflected on the paystub, so as to ensure that there is compliance with the FLSA minimum wage and overtime requirements.

2. Straight commission

In some industries, employee earn their wages solely on commission, or exclusively on the sales or goods they sell. This can be very motivating for individuals, particularly if the commission percentage is very high. However, if the employee is engaged in inside sales, the commissions paid must still cover the minimum wage and overtime requirements and, if they don’t, the employer must ensure that the employee is paid minimum wage and overtime.

3. Draws and guaranteed pay

A “draw against commission,” as it’s commonly referred to, is another options for employees who earn wages solely on commission. The draw is essentially an advance or loan.

In a nutshell, workers are given a certain amount of wages, a pre-determined draw, at the beginning of the pay period. During the period, they slowly earn the commission to pay back the draw. If they earn more than the draw amount, they receive the additional compensation. Alternately, if they fail to earn the commission percentage with sales equal to the draw or ‘loan,’ they will need to pay it back to their employer. Specific requirements regarding a draw against commission type of arrangement, however, will always depend on the employer-employee relationship and situation. Also, here again, if the employee engages in inside sales, the amount paid, whether by draw, commission or a combination of both, must cover the applicable minimum wage and overtime requirements.

4. Continuous, residual commissions

When an employee sells goods or services, they typically earn a one-and-done set commission. However, in certain industries, such as insurance sales, an employee may continue to earn a residual commission long after the initial sale if the buyer continues to purchase goods or services from the company. In some commission contracts, an employee may continue to earn a residual sale after they leave the company. On the other hand, the employer can, by contract or policy, impose a rule that commissions will only be paid if the employee is employed at the time that commission would have been paid in the normal course of business.

Although the above is an overview of common commission scenarios, each situation will always vary as will the provisions of each contract or commissions policy. Employers and employees planning to enter into an employment law agreement involving commissions are encouraged to reach out to an attorney with knowledge in this area of law.