How does FLSA Exempt Legal Requirements affect Commissioned Sales Employees?

May 26, 2016

Questions are starting to role in regarding exempt classification salary threshold change. Here’s one we are getting more often than others:

We have two currently salaried employees who make about $42,000 per year. However, with commissions, we estimate that they will make $48,000 or more per year. They can still be exempt, right? What happens if their commissions do not exceed the minimum of $47,476 as expected? We’ve double checked the duties test and they both qualify as executives. We’re just worried about the salary threshold.

This is a great question! This is definitely something employers with commissioned employees will want to keep an eye on. You are correct that if these employees make over $48,000, they can remain exempt. Up to 10% of the minimum salary threshold – $4,747 – may come from non-discretionary bonuses, commissions, or other incentive pay. Your commissioned employees will therefore need to be paid a guaranteed base salary of $42,729.

These incentive payments must be made on at least a quarterly basis, and if the employee does not earn enough of the incentive pay to reach the exempt salary threshold (pro-rated for the quarter, month, or whatever period you’re using), the employer must pay the difference in order to keep the employee’s exemption intact. The DOL calls these “catch-up payments.”

Here’s how these catch-up payments work. Because the annual salary threshold will be $47,476 and incentive pay must be made on a quarterly basis, commissioned employees need to make at least 25% of that amount (or $11,869) in base pay plus commission each quarter. If they make less than that amount per quarter, you’ll need to make a catch-up payment to cover the difference.

This payment must be made within one pay period and must only count toward their income during the previous quarter. If you fail to make a sufficient catch-up payment, the employee will be entitled to overtime pay for any overtime hours worked during that quarter.