Sometimes it’s clear when an employee is entitled to overtime pay, and how much, and other times it isn’t.The issue can become especially tricky when employees are paid at least partially in commissions. In a recent case, a federal appellate court remanded back to a lower district court its ruling on the allocation of commissions in determining overtime pay. The appeals court said the lower court didn’t properly interpret federal overtime law. (Freixa v. Prestige Cruise Services, LLC, CA-11, No. 16-13745, 4/14/17).
Key Facts of the Case
The District Court for the Southern District of Florida had ruled that a cruise ship employee who received commissions was ineligible for overtime pay. As a sales representative, the employee sold cruise trips to customers. He received a fixed salary of $500 a week plus commissions. During the one year he was with the company, he earned over $70,000 in compensation. Of this amount, 63% was paid in commissions.
The commissions were calculated monthly and paid the following month. Both parties agreed in court that the sales rep worked an average of 60 hours a week during his employment, but they disagreed about the number of hours he worked in any individual week.
Subsequently, the employee sued the cruise ship line for overtime pay. He argued that the compensation he received in certain weeks fell below the required threshold for the exemption from overtime that applies to retail workers who are paid commissions.
Lower Court’s Rationale
The district court acknowledged that the law generally requires a calculation of the regular rate of pay on a week-to-week basis. But the court found it difficult to determine the exact weeks during which the sales representative earned commissions.
As a result, it decided to divide his entire remuneration for the year across every hour in every week he worked — assuming 60 hours of work a week — to arrive at an average hourly rate of $23.45. Because that rate exceeded the exemption threshold of $10.88 per hour, the district court awarded summary judgment in favor of the cruise ship company.
In reaching this decision, the district court said it believed its calculation conformed with federal regulations that allow for a different “reasonable and equitable method” to calculate the regular rate of pay “if it is not possible or practicable to allocate the commission among the workweeks of the period in proportion to the amount of commission actually earned or reasonably presumed to be earned each week” (29 CFR 778.120).
Appeals Court’s Rationale
But that wasn’t the end of the story. After the sales representative appealed, the Eleventh Circuit Court overturned the lower court’s ruling, saying that the district court had misinterpreted the federal regulations.
The appeals court ruled that when commissions are computed monthly, those earned in one month might not be allocated across weeks worked in other months. Instead, federal regulations limit the district court to allocating commissions across weeks within the time period in which they were earned. The appeals court cited a related regulation that required as a general rule, “that the commission be apportioned back over the workweeks of the period during which it was earned” (29 CFR 778.119).
Based on the context of this and other regulations, the appeals court said it’s clear that the term “period” means “computation period.” For the sales representative in this case, it refers to each month of his employment, not the entire year that he worked. For example, the court said it believed that the district court could allocate commissions earned in January across weeks worked in January, but not across weeks worked from February through December.
We haven’t heard the last word on this matter. The case was remanded back to the district court for further proceedings.
What the Upper Court Cited
The regulation cited by the appeals court says that if calculation and payment can’t be completed until after the regular pay day, the employer may disregard the commission in computing the regular hourly rate until the amount of commission can be determined. Until then, the employer may pay overtime at a rate not less than one and one-half times the hourly rate paid the employee, excluding the commission.
Then, when the commission can be determined, the employer must pay any additional overtime compensation due once the commission is included. To compute the additional overtime, “it is necessary, as a general rule, that the commission be apportioned back over the workweeks of the period during which it was earned.”
The additional compensation must be not less than one-half of the increase in the hourly rate of pay attributable to the commission for that week in question multiplied by the number of overtime hours worked.
Key point: In accordance with the the Fair Labor Standards Act of 1938, an exemption to the usual overtime pay requirements exists for employees who work for a retail or service establishment if two requirements are met:
- The regular rate of pay exceeds one and one-half times the minimum hourly rate (that is, $10.88 an hour), and
- More than half of the compensation for a reasonable period (but not less than one month) represents commissions paid on goods and services.
This calculation of overtime pay under this exemption was at the core of the above case.
Avoid Rapid Decisions
The rules in this area are complex and may be open to interpretation. Don’t make any quick assumptions about your company’s responsibilities without consulting with your professional payroll advisors.