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Avoid minimum wage trap when paying commissioned salespeople

May 25, 2012
Just because a commissioned salesperson doesn’t sell any cars one week doesn’t mean you don’t have to pay him or her the minimum wage. Under the Fair Labor Standards Act, employees must be paid for all hours they work regardless of their compensation arrangements.
Salespeople, even if most of their income is in the form of commissions, are entitled to prompt payment of minimum wages on a regular payday—e.g., weekly, biweekly or monthly. Penalties for violating the rule can be substantial.
The FLSA gives auto dealers a break when it comes to overtime. The act states that “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles … employed in a non-manufacturing establishment primarily engaged in the selling of such vehicles … to the ultimate purchaser” is exempt from federal overtime requirements.
There are tips to follow to ensure compliance with minimum wage rules:
• Establish commission settlement periods of one month or less.
• Consider advancing a weekly “draw” to salespeople and settling their commissions on a biweekly or monthly basis. When settling the amount due at the end of the period, the dealer may credit draws or advances against commissions, provided the settlement results in payment of the minimum wage for all hours worked.
• If a salesperson’s commissions fall short of the minimum wage for hours worked during the settlement period, the dealer must pay the difference to the salesperson in the form of a subsidy. The subsidy may be carried forward and offset against future commissions earned but not net paid, provided such subsidy recoupment doesn’t result in violation of minimum wage requirements for the relevant pay period.
• Excess earned but unpaid commissions may be carried forward and applied toward minimum wages due in a subsequent period. Once a commission has been paid, however, it may not be carried forward.
• To avoid confusion, adopt a written policy that establishes a definite pay period. Keep accurate daily time records for all hours worked by salespeople, including lunch and dinner breaks.
• At the end of each pay period, compare hours worked by each salesperson with commissions earned to ensure that minimum wage requirements are met and any required subsidies are paid. Establish procedures for recovering minimum wage subsidies from excess commissions earned in future pay periods. Make sure the deductions aren’t taken from future minimum wage earnings.
• Check state minimum wage laws and regulations. Some states impose higher standards than those required under federal law.