Generally under the Fair Labor Standards Act (“FLSA”) an employer must pay its employees overtime compensation of one and one-half times the employee’s regular rate of pay for hours worked in excess of forty hours per week. 29 U.S.C. § 207(a)(1). This requirement does not apply to individuals who (1) work at a retail establishment (75% of the establishment’s gross annual revenues must be sales to an end user vs. wholesale); (2) regularly receive more than half of his or her compensation from commissions; and (3) receive at least 1-1/2 times the minimum wage for all hours worked. However, qualifying for this exemption can be more difficult than employers realize. In addition, the wage payment structure required for this exemption is quite complex and often misapplied by employers.

To rely on this overtime exemption under the FLSA, employers must demonstrate that more than half of the employee’s compensation for a representative period of at least one month represents commissions on goods or services. See 29 U.S.C. § 207(i). In order for compensation to be considered a commission, the amount paid to the employee must be based on a “bona fide commission rate.” 29 U.S.C. § 207(i). Accordingly, in determining whether more than half of an employee’s compensation came from commissions, a court must also determine whether the commissions paid to Plaintiff were the result of “the application of a bona fide commission rate.” Id. Courts have interpreted this phrase to require an inquiry into “whether the employer set the commission rate in good faith.” Erichs v. Venator Grp., Inc., 128 F. Supp. 2d 1255, 1259 (N.D. Ca. 2001).

While “the case law on the meaning of ‘commission’ under the retail commission exception is sparse,” Parker v. NutriSystem, Inc., No. 08 Civ. 1508, 2009 WL 2358623, at *4 (E.D. Pa. July 30, 2009), the United States Department of Labor has provided some guideposts for analyzing compensation plans in which “the employee will be paid [a guaranteed] stipulated sum, or the commission earnings allocable to the same period, whichever is the greater amount.” 2 9 C.F.R. § 779.416(a). The DOL regulations offer two examples of what is not a “bona fide commission rate.” First, a commission rate is not bona fide if the formula for computing the commissions is such that the employee, in fact, always or almost always earns the same fixed amount of compensation for each workweek (as would be the case where the computed commissions seldom or never equal or exceed the amount of the draw or guarantee). Another example of a commission plan which would not be considered bona fide is one in which the employee receives a regular payment constituting nearly his or her entire earnings which is expressed in terms of a percentage of the sales which the establishment or department can always be expected to make with only a slight addition to his wages based upon a greatly reduced percentage applied to the sales above the expected quota. 29 C.F.R. § 779.416(c).

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