Commission-Only Pay Plans: Hidden Wage-and-Hour Risks for Ohio Employers
By: Nick Pahuta
A common, costly mistake occurs when an employer assumes that paying an employee entirely by commission eliminates traditional wage-and-hour obligations.1 Consider the following worst-case scenario:
An Ohio employer hires a sales employee and structures the position as “commission only.” The employer assumes that because the employee’s compensation is tied solely to sales, the position is exempt from both minimum wage and overtime requirements. As a result, the company does not track the employee’s hours. Over time, the employee routinely works 50 to 60 hours per week building the company’s customer base. Because commissions are tied to closed deals and paid monthly, the employee experiences several weeks where earnings are minimal despite significant hours worked. Eventually, the employee leaves the company and files a wage-and-hour lawsuit.
In litigation, the employer discovers two significant problems. First, the employee was never exempt from overtime under applicable law. Because the employer did not track hours worked, a court may rely on the employee’s estimates of working 55 or more hours per week. The employer could therefore be liable for years of unpaid overtime, calculated using a reconstructed regular rate that includes all commissions earned.
Second, the commission-only structure did not consistently satisfy minimum wage requirements. When the employee’s commissions are allocated across the hours worked in certain weeks, the effective hourly rate falls below the required minimum wage. The employer must pay back wages to make up the shortfall.
Under federal and Ohio wage laws, the potential exposure does not stop there. The employer most likely faces liquidated damages equal to the unpaid wages, the employee’s attorneys’ fees and litigation costs, and potentially a multi-year damages period if the violation is found to be willful.2
What began as a straightforward commission arrangement can quickly evolve into a high-value wage-and-hour claim. This scenario illustrates why commission-based compensation plans must be carefully structured to ensure compliance with minimum wage, overtime, and recordkeeping requirements.
Minimum Wage Compliance
The most immediate risk with a commission-only pay plan is compliance with minimum wage requirements. Both federal law and Ohio law require that employees earn at least the applicable minimum wage for all hours worked.3 Even if an employee’s commissions are high over time, the employer must ensure that the employee’s total compensation divided by the hours worked in a given pay period equals at least the minimum wage. If commissions fluctuate or are paid infrequently (for example, monthly or quarterly), an employee could easily fall below the required hourly rate during pay periods.4
Overtime and the Regular Rate of Pay
Another common compliance problem involves overtime. Nonexempt employees must receive overtime compensation for hours worked over 40 in a workweek. Importantly, overtime is calculated based on the employee’s regular rate of pay, which must include commissions.
Employers sometimes mistakenly believe that commission-based employees are not entitled to overtime. In reality, many commission-paid workers are still nonexempt and must receive overtime.
To calculate overtime properly, employers must determine the employee’s regular rate by dividing total earnings—including commissions—by the total hours worked in the workweek. The employee must then receive an additional half-time premium for each overtime hour worked.5
Exemption Misclassification
Some employers attempt to avoid overtime obligations by classifying commission-based employees as exempt from overtime requirements. This approach is risky unless the position clearly meets the requirements of a recognized exemption.
Many sales roles do not qualify for exemptions. For example, inside sales employees often fail to meet the criteria for common exemptions such as the administrative or executive exemptions. While certain retail or service establishments may qualify for a federal commission-based overtime exemption under specific circumstances, the requirements are technical and must be carefully analyzed.
Misclassifying employees as exempt when they do not meet the legal standards can expose employers to years of unpaid overtime liability.
Recordkeeping Challenges
Commission-only pay plans also create recordkeeping issues. Employers sometimes assume that because compensation is tied to revenue rather than hours, time tracking is unnecessary. That assumption is incorrect for nonexempt employees.
Employers must still maintain accurate records of hours worked. Without reliable time records, defending a wage-and-hour claim becomes significantly more difficult, as courts may rely on the employee’s estimate of hours worked.
Practical Steps for Employers
Commission-based compensation can still be implemented, but it should be structured carefully. Employers should consider:
- Ensuring employees always earn at least minimum wage each pay period
- Tracking all hours worked by nonexempt employees
- Properly calculating the regular rate of pay when commissions are involved
- Analyzing whether any exemption truly applies
- Drafting clear commission agreements that explain how compensation is calculated, when commissions are earned, and how commissions should be paid out if an employee leaves the employer’s service.
Because the wage-and-hour rules governing commission pay are highly technical, employers should seek legal guidance before implementing or modifying commission-based compensation plans.
If your organization is considering a commission-only pay structure, or if you want to evaluate whether your current pay practices comply with applicable law, the employment attorneys at Strauss Troy can help assess potential risks and develop compensation policies that support both compliance and business goals.
Sources:
1. See “Zeigler Auto Group pays $85K in back wages to 214 workers after US Department of Labor investigation,” U.S. Department of Labor, March 31, 2021, https://www.dol.gov/newsroom/releases/whd/whd20210331.
2. 29 USC § 216(b)
3. 29 USCS § 206; ORC 4111.02.
4. 29 CFR § 779.940.
5. 29 CFR § 778.117.
