Proper Methods for Calculating Hourly Rate of Pay for Employees on Commission to Determine Compliance with FLSA

A law student once joked with his law professor, who was discussing a topic that involved math skills, by interjecting, “Excuse me, sir. I must object. I was told there’d be no math (in law school).” While perhaps a good source of humor after a long day of legal studies, it’s actually not true. Many lawyers are very adept at math, including your Georgia wage-and-hour attorney. Compliance with the Fair Labor Standards Act means understanding many things, including some math. It also means knowing which mathematical calculation methods for determining compliance with minimum wage and overtime rules are allowed by the law, and which aren’t. In the case of a salesman who received commissions, the law required allocating his commissions to the month when he earned them, rather than just doing a calculation that averaged the salesman’s commissions across his entire 12-month period of employment.

The employee was a salesman who sold cruises for a cruise company. He held that job from December 2013 to December 2014. The job paid $500 per week plus monthly commissions. During his 12½ months of employment, the salesman earned roughly $70,000. While there were some months in which the salesman made as much as $11,000, there were others in which he made only $2,000.

He worked, on average, approximately 60 hours per week. The salesman sued his employer for violating the FLSA. The employer, the salesman contended, owed him overtime pay that it had not paid him. The employer, on the other hand, argued that the salesman was an exempt employee and, as a result, didn’t qualify under federal law to receive overtime pay.

In this case, what ensued was a dispute regarding the proper way to calculate an employee’s rate of pay. It was essential to the case’s outcome because federal law says that, if you make $10.88 per hour or more, your employer is not required to pay you overtime.

When a dispute involves an employee who receives commissions, determining the correct rate of pay can be even more challenging because, in some employment arrangements, assessing when a commission accrued may not always be clear. The federal law allows for the “use of a different ‘reasonable and equitable method’ of calculation” of an employee’s hourly rate in circumstances in which an exact allocation is not practical or possible. In this case, the trial court took the salesman’s total income and divided it by the total number of hours he worked from December to December. That equation yielded a result of $23.45 per hour. Based upon this, the court determined that the salesman was exempt and sided with the employer.

On appeal, the employee challenged the lower court’s methodology for calculating his hourly rate of pay. The appeals court agreed that the method was not acceptable. In explaining its opinion, the
appeals court highlighted some things that courts can’t do. For example, if an employee works 30 hours in one week and 50 hours the next, a court cannot declare him exempt from overtime pay simply because he averaged 40 hours per week.

Similarly, when an employee earns compensation on a monthly basis, it is not acceptable to determine his applicable hourly rate across a 12-month timeframe. Calculating the rate that way would potentially result in allocating commissions earned in one month to another unrelated month. This salesman earned $9,000 in commissions in February 2014. In July 2014 and November 2014, he earned no commissions. Following the methodology this trial court used essentially allocated part of the salesman’s February commissions to lower-earning months like July and November, as if he’d earned $3,000 in commissions in each of the three months.

The regulations require allocating compensation to the computation period in which it accrued. For this salesman, that meant “each month of his employment, not the whole year he worked.” Since the calculation method was improper, the employee was entitled to a reversal and a renewed opportunity to pursue his case.

Whether you’re involved in an overtime case, a minimum wage case, or some other type of employment law matter, put the knowledgeable Georgia overtime attorneys at Parks, Chesin & Walbert on your side. Our attorneys have been effectively representing both employees and employers in their wage and hour and other employment cases for many years.

To speak with one of our lawyers about your case, call 404-873-8048.

More blog posts:

Tennessee Cable Installers’ FLSA Class Action Goes Back Before Sixth Circuit After U.S. Supreme Court Ruling, Atlanta Employment Attorneys Blog, Jan. 12, 2017

Georgia Bodyguard’s $65K Damages Award in Unpaid Overtime Case Withstands Appeal, Atlanta Employment Attorneys Blog, Aug. 11, 2016

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