[Author: Tom Junge, Iowa Field Director, 2015 | Keywords: Regulatory Compliance, Department of Labor, DOL]
Recently, three consumer product (CP) dealers reported that they were audited by the Department of Labor. As a result of these audits, two dealers discovered they were not adjusting commissions for overtime for their technicians and parts personnel.
According to one dealer, the auditor told them that by paying a commission, they were in effect keeping the workers base hourly wage lower, thus avoiding higher overtime pay. By adding the commission into the base rate, the worker receives the full overtime benefit as if their base wage was higher.
Unaware of this rule, I Googled it and here is what I found:
29 CFR 778.118 – Commission paid on a workweek basis.
When the commission is paid on a weekly basis, it is added to the employee’s other earnings for that workweek (except overtime premiums and other payments excluded as provided in section 7(e) of the Act), and the total is divided by the total number of hours worked in the workweek to obtain the employee’s regular hourly rate for the particular workweek. The employee must then be paid extra compensation at one-half of that rate for each hour worked in excess of the applicable maximum hours standard.
Let’s look at an example:
Employee worked 46 hours in a week. Base wage is $12/hour. Commission earned is $92.
How the dealer calculated it: 40 hrs base x $12/hr = $480
+ 6 hrs x $18/hr (overtime rate) = $108
+ Commission = $92
Total = $680
How it should have been calculated:
Method 1 First calculate new base rate:
46 hrs x $12/hr = $552 plus $92 commission = $644 divided by 46 hrs = $14/hr
46 hrs x $14/hr =$644
6 hrs x $7 (extra half portion for time and half) = $42
Total = $686
Method 2 Commission $92/46 hrs = $2/hr
$2/hr x .5 (extra half portion for time and half) = $1/hour
6 overtime hours x $1/hr = $6
Add $6 + $680 (how the dealer calculated it above) = $686
29 CFR 778.120 – Deferred commission payments not identifiable as earned in particular workweeks.
This section addresses a monthly commission.
Assume an employee earned $416 in commission for the month and had 44, 40, 44 and 48 hour weeks in this time period.
First, figure the amount of commission allocable to a single week. The amount of commission would be $96 ($416×12 months = $4,992÷52 weeks = $96). In weeks one and three, divide $96 by 44 for $2.18, then multiply $2.18 by 0.5 (extra half portion for time and half) for $1.09, and multiply $1.09 by 4 hrs, which equals $4.36 in additional overtime.
In week two, there is no additional overtime because the person worked only 40 hours.
In week four, $96 would be divided by 48, equaling $2.00, then $2.00 would be multiplied by 0.5 for $1.00, and $1.00 would be multiplied by 8 hrs for additional overtime in the amount of $8.00.
The extra commission needed to be paid for the month is $16.72 ($4.36 + $0 + $4.36 + $8.00).
As you can see these calculations can be time consuming and a little messy. In many cases, the dollar amount might be minimal, but it is the law.
NOTE: This law applies to consumer product and industrial equipment dealers and for non-exempt employees of ag equipment dealers such as CP technicians and set-up personnel. Ag technicians and parts personnel are generally exempt from overtime (29 CFR 779.372 Nonmanufacturing establishments with certain exempt employees under section 13(b)(10)).
I’m far from being an expert in this area, so please consult with your CPA or attorney to make sure you are paying your commission correctly. If you have further questions, call our HR Helpline at 855.277.5575.