Failure to Properly Calculate Overtime for Certain Commissions

Failure To Properly Calculate Overtime for Certain Commissions

An employee must be paid 1 1/2 times his or her regular base rate of pay for hours worked beyond 8 hours in a day or 40 hours in a workweek (whichever is more beneficial to the employee). To calculate an employee’s overtime rate of pay, the employer must first calculate the employee’s regular base rate of pay, and multiply that number by 1.5 to get an overtime rate.

The California Department of Labor Enforcement (DLSE) sets out specific rules to follow when calculating the regular base rate of pay. Since commissions are wages, an employer must pay overtime on all commissions and must include commissions in calculating the regular base rate of pay unless the commissions are specifically excluded by law from inclusion in regular rate calculations.[1]

Unfortunately, many employers do not include commissions and other additional money an employee earns in calculating the employee’s regular base rate of pay for overtime purposes. This is frequently a problem for inside sales representatives who receive commissions on their sales or sales representatives that are classified as independent contractors. In determining the overtime rate under California law, the regular base rate must be calculated by taking all of an employee’s regular wages (hourly pay, salary, bonuses, commissions, etc.) earned in a given week and dividing it by 40. The overtime rate is then multiplied by 1.5.

Employers often simply take the employee’s hourly rate without including the wages earned from commissions, and multiply the hourly rate by 1.5 and use that as the overtime rate. If the employer correctly calculates the base rate by including all of the employee’s wages, including the commissions earned, it can make a considerable difference in the amount of money an employee receives in overtime pay.

Overtime Pay Calculation Examples:

Assume a salesperson makes $20 per hour as a base rate of pay, and makes an additional $1,000 per week in commissions and works 20 hours of overtime each week.

If the salesperson’s employer calculates his overtime pay by taking his hourly rate of $20 and multiplying it by 1.5, the employer arrives at an overtime rate of $30 per hour ($20 x 1.5 = $30). This equals $600 of overtime pay each week or $31,200 per year ($30 x 20 hrs. = $600) and ($600 x 52 wks = $31,200).

However, under California law, the employer is required to take the regular $20 hourly base pay rate times the 40 hours worked which equals $800 per week ($20 X 40 hours = $800) and add it to the $1000 in commissions earned to arrive at the total weekly pay of $1,800. This number should then be divided by 40 to arrive at the regular base rate which is $45 ($1,800 divided by 40 = $45). The regular base rate of $45 should then be multiplied by 1.5 to obtain an overtime rate of $67.50 per hour instead of an overtime rate of $30 per hour. This means the employee should be receiving $1,350 of overtime pay each week instead of $600 of overtime pay each week, and $70,200 per year instead of $31,200 per year.

In this example, it is easy to see that each year the employer calculates the employee’s overtime pay without including the commissions earned, the employee is receiving $39,000 less than he is legally entitled to receive ($70,200 – $31,200 = $39,000). California employees whose commissions and overtime have not be calculated properly are entitled to recover up to four years of unpaid wages, which in this example would equal approximately $156,000. Assuming there are ten such salespeople working for a company, this adds up to over $1.5 million over four years.

If you are receiving commission wages and believe your overtime pay has not been properly calculated, you should contact me immediately for a free case evaluation to figure out what you are entitled to in the way of unpaid overtime wages. The laws are complicated, and you should obtain an opinion from someone knowledgeable about the issues. If you are owed any unpaid wages, you may also be entitled to waiting time penalties, attorney’s fees, and costs.

I have created a brief intake questionnaire to gather information about your potential case. You can immediately transmit this information to my office where it will be maintained in strictest confidence. After I review your questionnaire, if I believe I can help you, I will contact you and discuss your case in detail. You may also call my office at (818) 986-8900 or (800) 350-2098 for a free consultation.

[1] Employees who fall under Industrial Welfare Commission Wage Order 4 (Professional, Technical, Clerical, Mechanical and Similar Occupations) or Wage Order 7 (Mercantile) are not entitled to overtime if their earnings exceed 1 1/2 times the minimum wage and if more than half of that employee’s compensation represents commissions. This last category includes most all outside sales representatives.