By: Sally Still, Esquire
The Fair Labor Standards Act (“FLSA”) and some state statutes, require employers to pay overtime. Generally, overtime is time and one-half the employee’s regular rate of pay for all hours over 40 hours in a week. However, this requirement is subject to a number of “exemptions.”
Commissioned sales people may fall within one of those exemptions, known as “7(i)”. For the exemption to apply, certain conditions must be met:
- The company must be a retail or service establishment defined in the FLSA;
- The employees’ overall regular rate of pay must be more than 1.5 times the minimum wage; and
- More than half of the employee’s compensation for a representative period (not less than one month) must be in the form of commissions earned on goods and services sold.
In this blog, I highlight the main concerns in application of the exemption to the pest control industry.
Pest Control industry service specialists or “techs” may be exempt under this law, in some circumstances. Often, pest control techs are paid on a commission basis and are able to set their own schedules, can work fewer hours in one week and more in the next. This historically gives them great flexibility in scheduling their own work.
However, as a result, they could (if they chose to) “game” the system and load up on work one week to get paid some premium overtime pay at the Employer’s expense, and then coast in the next week. By doing so, they could work fewer hours than a regular employee working two forty hour work weeks, but yet earn more compensation.
The key to understanding whether the exemption applies is following a step by step analysis. The devil is in the details. If one “i” is not dotted, or one “t” is not crossed, the exemption may be lost. This is a federal statute and compliance is very technical. The law is enforced by lawsuits filed in federal court (literally “making a federal case” out of it) and by the U.S. Department of Labor. Neither alternative is good for an employer.
Let’s take this step by step.
(1) Pest Control Companies May be Retail or Service Establishments.
A series of pest-control industry cases concluded that these companies are “retail” or “service” “establishments.” The retail or service establishment performs a function in the very end of the stream of distribution, and does not take part in the manufacturing process.
(2) Regular Rate Must be 1.5 times Minimum Wage.
To qualify, the pest control sales techs (in Florida) must earn at least $12.08 per hour (as of 2015), for all hours that they work in any given week (federal and various state minimum wage laws may differ).
(3) 50% of Compensation Must be Based on Commission.
The employer must calculate commissions on a monthly basis and determine that at least half of the compensation paid out each month is from commissions.
An example with real payroll numbers helps illustrate how this works.
Sales Tech John Smith received a guaranteed wage of $12.08 per hour. In January, he works 30 hours in week one, 40 hours in week two, 45 hours in week three, and 50 hours week four. Therefore, he is paid $362.40 in week one, $483.20 in week two, $543.60 for week three and $604.00 for week four. His total guaranteed compensation for the month is $1,993.20. At the end of the monthly commission cycle, John Smith earned $1,000.00 in commissions, including the percentages he received for his monthly regular customers, upselling and add-on services. That sum is paid against (or deducted from) the guarantee already received (in other words, a draw against commission is permissible). In this example, the employee will have earned $ 1,993.20 in regular pay, and $1,000 in commission pay. After the commission is deducted from the draw, John Smith’s earnings are $993.20 in regular pay and $1,000 in commission, so at least 50% of his earnings that month would have been from commissions. Therefore, the 7(i) formula is met and no additional compensation is required.
As pest control sales and service technicians are covered by the FLSA, the employer is obligated to pay at least minimum wage and overtime after 40 hours are worked in any given work week unless an exemption applies. The employer can reduce its exposure to overtime compensation if it follows carefully the commissioned sales exemption using the 7(i) formula.
It appears that the 7(i) method becomes the most cost effective compensation plan when the tech earns significantly more in commissions than they would under a traditional hourly wage and overtime method. Remember though, where the tech regularly fails to earn commissions equal to or greater than the minimum guarantees during the representative period, the exemption fails and the employee must be paid time and time half his regular rate for his overtime hours.
The savings which can be achieved if this system is administered properly can be substantial over a large workforce or over an extended period of time. Payroll companies can accommodate these calculations, if the system is set up correctly from the start. However, as noted above, one misstep and you may find yourself in federal court or dealing with the U.S. Department of Labor. Consult with an experienced labor attorney to make sure that you set up a compliant payroll process, so that the exemption will hold up if it is challenged.
Sally Still is a partner with the law firm of Ward Damon Posner Pheterson and Bleau, located in West Palm Beach, FL. She is Florida Bar Board Certified in Labor and Employment Law and frequently defends employers sued under the FLSA for overtime. This article is intended for general information purposes only and is not intended as legal advice because each situation is different. If you need guidance with respect to specific circumstances or issues, please seek advice of counsel. Ms. Still may be reached at firstname.lastname@example.org.