Most employers are familiar with New York’s minimum and overtime wage laws, but many may not know that the same standards must be satisfied for employees paid on commission. If a commissioned employee earns less than minimum wage over the course of a single workweek, his or her employer is in violation of New York’s minimum wage law. This is the case, even if the employee earns more than minimum wage on an annual basis. A recent case demonstrates how commissioned workers must be compensated. The same case also illustrates how officers of an organization may be held personally liable for violations of New York Labor Law.
The federal court sitting in the Eastern District of New York decided Karic v. Major Automotive Companies Inc., a case between Major Automotive Companies Inc. (“Automotive”) and a group of its salespeople. Automotive owns several car dealerships in Queens, and, as is common in the industry, the organization compensated its salespeople through commission. The salespeople were paid a base wage of $20 a day, plus a percentage of each car or service they sold. Some weeks a salesperson may sell two or three vehicles, while in other weeks, that salesperson might fail to make a single sale. During these down weeks, that employee would earn $100 for 45 to 55 hours of work. These employees claimed they were entitled to receive minimum wage and overtime compensation during such down weeks. The court ultimately agreed.
Automotive attempted to defeat plaintiffs’ claims by drawing the court’s attention to the annual earnings its commissioned salespeople received. Despite the “down weeks,” car salespeople earned an average annual salary of $50,000, which greatly exceeded the minimum and overtime wages to which plaintiffs claimed to be entitled. The court explained that New York State’s minimum wage law establishes the workweek as the timeframe in which compliance questions should be analyzed. Once the timeframe issue was settled, Automotive’s annual earnings defense was defeated.
In addition to its analysis of commissioned worker compensation, the court also found that the officers of Automotive were in fact employers, and held them personally liable for the damages suffered by the plaintiffs. The court sought to determine if individual officers exercised the kind of discretion which would make them responsible for damages suffered by employees.
The court pointed to a four factor test, recently reinforced in a Second Circuit opinion, to determine officer responsibility. According to the court, officers can be personally liable if they: 1) have the power to hire and fire; 2) set schedules and work to be performed; 3) set the rate and method of payment; and 4) maintain employment records.
New York Labor Law requires that employees working for commission have a written agreement, detailing: 1) how the commission will be calculated; 2) the frequency of payment; and 3) details relevant to determination of wages upon termination of employment. In the absence of such an agreement, courts are likely to draw conclusions in a light most favorable to employees. Conversely, if employers have a well written agreement, it can serve as the first line of defense and demonstrate compliance when violations are alleged.
Considerations for Employers
Paying commission is a legitimate form of compensation, but minimum and overtime wage rates must be satisfied on a weekly basis. Providing proper minimum wage and overtime to commissioned employees may avoid liability both for the organization and its individual officers. In addition, drafting a written agreement outlining compensation terms can guide the relationship between an employer and a commissioned worker, and it can help ensure compliance issues are addressed and satisfied before violations can be alleged.