As discussed in a prior newsletter article, employers are required to satisfy the New York minimum wage and overtime laws as well as the federal Fair Labor Standards Act (“FLSA”) in order to pay employees on commission. Proper compensation for commissioned employees can be challenging for employers due to the numerous requirements that must be met. This article will provide an update on what employers need to know when compensating commissioned employees.
Under the New York Labor Law, commissioned salespersons are defined as “any employee whose principal activity is the selling of any goods, wares, merchandise, services, real estate, securities, insurance or any article of thing and whose earnings are based in whole or in part on commissions.”
Under the FLSA, employers are required to pay employees overtime for hours worked over 40 hours in a single workweek. However, a commissioned salesperson may be considered an exemption to the FLSA requirements if certain tests are met.
The FLSA provides an exemption from both minimum wage and overtime pay for individuals employed as bona fide executive, administrative, professional and outside sales employees. To satisfy the requirements for the outside sales employee exemption, the following tests must be met: (1) the employee’s primary duty must be making sales or obtaining orders or contracts for services or for use of facilities for which a consideration will be paid by the client or customer; and (2) the employee must be customarily and regularly engaged away from the employer’s place(s) of business.
In addition, employees receiving commissions by retail and service establishments (inside sales employees) may also be exempt from the FLSA requirements. Under this exemption, employers must satisfy three conditions: (1) the employee must be employed by a service or retail establishment, and (2) the employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in one workweek in which overtime hours are worked, and (3) more than half of the employee’s total earnings in a representative period must consist of commissions.
Under the New York Labor Law, employers are required to have a written agreement with commissioned employees. Such agreements must provide: 1) how the commission will be calculated; 2) the frequency of payment; and 3) details relevant to the determination of wages upon termination of employment. If a written agreement does not exist, courts most likely will draw conclusions more favorable to employees. However, if employers have a well written agreement, it can serve as an affirmative defense and establish compliance when violations are alleged. Employers are required to retain commission agreements for at least three years and may be required to provide copies to the New York State Department of Labor upon request.
Compensation with A Draw
A “draw” is a payment to a commissioned employee that is credited, wholly or partially, against future commissions. Typically, draws function like an advance or guaranteed minimum payment of commissions subject to settlement at set periods of time. At settlement, draws made are supplemented by any additional commission earnings that exceed amounts paid previously. For the settlement/recovery to be permissible, the frequency and terms of the settlement must be set forth in the commission agreement. In addition, draws can only be reconciled against future commissions. Employees who are terminated or leave the employer’s employment cannot be required to repay this type of draw. Further, draws cannot be recouped from earnings other than commissions.
New York courts have consistently held that unless there is a specific agreement stating that a commissioned employee must pay back draws, he/she is not required to repay those draws if the commission does not become final and payable to the employee. The employment agreement must also specifically set forth the time periods of pay back. For example, every 90 days, a calculation will be made to determine if the commissioned employee has earned commission of less than the draw paid during that period of time and that if the draw paid is greater than the earned commission, the employee must pay the difference to the employer. Without such statement in the agreement, the employee may not be required to repay any draw against commission.
A commission is considered “earned” at the time specified in the agreement. However, if the agreement is silent on this topic, a commission is deemed to be earned in accordance with past practices between the employer and the commissioned sales employee. If there are no such past practices, then a commission is considered earned when the commissioned employee produces a person that is ready, willing, and able to enter into the contract upon the employer’s terms.
Under New York law, the written agreement must detail how wages and other forms of compensation will be calculated if the employee is terminated. Failure to include these terms or if the terms are uncertain, any dispute will be resolved as to the meaning of the terms in favor of the employee. Commissioned employees whose contracts are terminated must be paid within five (5) business days after termination or within five (5) business days after they become due in the case of earned commissions not due at the time the contract is terminated.
When compensating employees on a commissioned basis, it is essential that employees follow state and federal minimum wage and overtime requirements. In addition, employers are required to meet specific conditions in order for an employee to qualify as exempt from the FLSA requirements. Finally, employees are encouraged to enter into commission agreements with employees to avoid any potential liability.