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Commissions: Questions & Answers
A commission is a sum paid to an employee for transacting business or performing a service. Commonly, a commission is a percentage of total sales or sales in excess of a certain amount. It may be the sole source of income to the employee or it may be paid in combination with a wage or salary. Commission agreements with employees should be written in order to avoid confusion and misunderstandings that could result in wage claims or litigation.
 
Q. When I place an employee on a commission, does that mean I don´t have to pay minimum wage or overtime?
A. No. A commission, like a wage or salary, is just a method of compensating employees for services. Employees must still receive no less than the applicable minimum wage and overtime at 1.5 times their average hourly rate for work over 40 hours in a seven-day week. Federal law requires employers to include commissions when they calculate the employee´s average hourly rate. Oregon law does not require commissions to be included. However, if the average hourly rate is less than the minimum wage, the employer must boost the hourly rate up to the minimum wage and pay overtime at 1.5 times that rate.
Note: Most Oregon employers are covered by federal law and must include commissions in the regular rate.
Q. Are there any commissioned employees who are exempt from the minimum wage and/or overtime rules?
A. Yes. Both federal and state laws provide several specific exemptions.
 
Commissioned employees exempt from BOTH the minimum wage and overtime rules include:
Outside Salespeople
Employees who regularly sell or obtain orders or contracts for goods, services, or facilities away from the employer´s business locations are exempt from minimum wage and overtime, provided that the hours worked in "other than outside sales" in each workweek do not exceed 30 percent of the hours worked by other nonexempt employees.  
 
The Federal Law changed in 2004 where employers only have to meet the "primary duty" test. Remember, Oregon employers must follow the stricter State of Oregon outside sales standard where 30% of their work is in-house/non-exempt.
Commissioned employees exempt from overtime rules but NOT exempt from the minimum wage rules include:
Sales, Partspeople and Mechanics
The overtime rule does not apply to employees who sell or service autos, trailers, trucks, or farm implements, provided that the employer is primarily involved in selling these items, and does not manufacture the item. For example, dealerships qualify for this exemption.
 
Commissioned Employees in Retail or Service Establishments
Overtime rules do not apply to an employee paid on a commission basis, provided that the regular rate of pay for the employee is over 1.5 times the current Oregon minimum wage, and over 50 percent of the employee´s pay for a period of not less than one month represents commissions earned on goods or services sold. Employers may pay a guarantee or allow draws against anticipated commissions and still qualify for this exemption as long as both criteria are met.
Q. How do I compute the regular hourly rate of pay if my commissioned employees do not qualify for one of the above exemptions?
A. Most employers are subject to federal law that requires them to include commissions in the regular rate. To compute the regular rate, add the commission earnings to any other earnings for the week and divide by the number of hours worked in that workweek.  
For example, if an employee is paid $100 as a flat rate, and is also paid commissions for $300 for 38 hours of work, then:
$100 plus $300 = $400
$400 divided by 38 = $10.53/hour is the regular rate
Since the employee did not work over 40 hours, no overtime is due. If the employee had worked 43 hours, the regular rate would be $400 divided by 43 equals $9.30. An additional half-time is due for the three overtime hours.
$9.30 divided by 2 x 3 = $13.95  
Note: Since the employee had already received straight time earnings for all hours worked, only an additional half-time is due for the overtime.
Q. What if the employee receives deferred commissions? When do I pay overtime?
A. If the commission cannot be calculated until after the regular payday, the employer may disregard it until the amount can be determined. Once the commission is determined, the overtime must be computed and paid. This applies only to federally-regulated employers because state law does not require the inclusion of commissions for computing overtime.  
For federally-regulated employers, in order to compute the overtime on deferred commissions, the commission must be apportioned back over the time period in which it was earned. Then an additional half-time will be due for any overtime hours
Example: An employee worked 188 hours during the month of June which included 20 hours of overtime. Commissions amounting to $1200 were paid for that time period.
$1200 divided by 188 = $6.38
$6.38 divided by 2 = $3.19
$3.19 x 20 = $63.80 additional overtime due
Note: Only an additional half-time is due because the employee already received the straight-time pay.

Q. If I pay on a deferred commission basis, must I pay minimum wage in the interim until the commission amount is figured?
A. Yes. The applicable minimum wage must be paid in the interim. If there is a written offset agreement, these amounts may be deducted from the deferred commission once it´s received. 
 
Q. What if I pay my employee a draw or advance on commission sales and the sale is canceled?
If the commission agreement specifies that commissions are not earned until the sale is final and the agreement further provides for such "offsets," the advances or draws may be deducted from future commissions.
 
 
Q. When a commission paid employee is discharged with sales income yet to be received by our company, when is the final paycheck due?
A. The check is due by the end of the next business day. However, if the commission agreement expressly provides that commissions on sales are not "earned" by the employee until payment is received by the company, the company may pay all other earnings to the terminated employee, but exclude commissions on sales not yet earned. These may be paid at a later date, when the amounts due are known.
 
Q. Are commissions collectible under Oregon´s Wage Collection Law?
A. Yes. It is important to place the agreement in writing with the aforementioned issues fully addressed to avoid confusion and litigation.

 

DISCLAIMER
 
Nothing on this website is intended as legal advice.  Any responses to specific questions are based on the facts as we understand them, and not intended to apply to any other situations.  This communication is not an agency order.  If you need legal advice, please consult an attorney.  We attempt to update the information on this website as soon as practicable following changes or developments in the laws and rules affecting Oregon employers, but we make no warranties or representations, express or implied, about whether the information provided is current.  We urge you to check the applicable statutes and administrative rules yourself and to consult with legal counsel prior to taking action that may invoke employee rights or employer responsibilities or omitting to act when required by law to act.
 
 
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