I just hired a couple of inside sales people to generate business for my growing company. I have never paid anyone on a commission basis before. Are there any special requirements regarding commissioned employees?

November 10, 2016

Topics: Pay Practices

“Commissioned employees” are generally sales employees whose compensation is based on the value of the goods or services sold.  Their “commission” is often calculated as a percentage of the gross amount of each sale, although other factors may go into this calculation.  This form of compensation is used almost universally as a method of motivating sales people to achieve a company’s sales goals.  In addition to encouraging top performance from employees, paying them on a commission basis can help to control costs during periods when sales volume is low.  There are, however, a couple of legal points to keep in mind when making commission-based compensation arrangements with employees.

For one thing, many employers are not aware that most inside sales people are not exempt from the requirements of the applicable overtime laws.  If inside sales people rack up lots of hours in the attempt to book the maximum number of sales, they will have to be paid one and one-half times their “regular wage” for any hours worked in excess of forty in a workweek.  This misunderstanding has been the basis for staggering back overtime pay awards against employers in recent years.  For purposes of calculating overtime wages owed, the “regular wage” of a sales person includes any base pay plus commissions earned in a workweek.  For example, if a sales person is paid a base of $400.00 per week, and also earns $200.00 in commissions in a particular workweek, his or her “regular wage” will be $400.00 plus $200.00, or $600.00 for that week.  To calculate the overtime rate, that weekly wage is divided by 40 to arrive at $15.00 per hour.  The sales employee’s overtime rate will be $15.00 X 1.5 = $22.50 per hour worked over 40.   While there are several narrowly defined overtime exemptions for certain types of sales people, especially those considered “outside sales people” who make their sales on the road, an employer should never rely on those exemptions without having counsel carefully review their applicability to its business.

Also, state law may dictate how often commission compensation must be paid.  For example, in New York, commissions usually must be paid out at least once a month, no later than the last day of the month following the month in which the commissions were earned.  (Any base pay that is provided in addition to commissions must be paid at least semi-monthly.)    “Bonuses” based on sales volume (such as a sales manager’s “override”) can be paid less frequently than once a month, as specified in a written agreement.  When the employment of a sales person is terminated, he or she must be paid any commissions earned.  It is prudent to have a written agreement that clarifies how these payments are made.

The essential tool for any employer with a sales force is a written agreement with each sales person spelling out precisely how and when commissions are “earned” – generally when goods sold are delivered and billed to the client, but possibly not until the company receives payment.  This agreement should also explain any other financial issues related to sales, for example, the structure of any volume-based bonus arrangement or any procedures for reimbursement of expenses.  It is also important to specify exactly how commissions are calculated, and when that formula will be performed.

While a simple commission agreement will suffice in some situations, it is often prudent to include non-competition, non-solicitation, and non-disclosure language in employment agreements with sales people.  No employer relishes the prospect of losing a key sales person who has detailed information about client purchasing habits and has been privy to sensitive pricing data and marketing plans to a competitor, and seeing that information used to its disadvantage.

Informal and/or unwritten compensation arrangements with sales people place an employer at risk.  Likewise, sloppy sales tracking, timekeeping and pay practices relative to the sales force invite employer liability.  It is best to review any new employment relationship with a sales person with counsel, to make certain that your agreements and practices comply with the law.  This is an effective way to make sure that your sales people are an asset for your business in every sense.