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Exemptions from Wage and Hour Requirements: Commissioned Employees

Federal and state wage and hour laws both exempt certain employees who earn commissions from their overtime requirements. The Fair Labor Standards Act contains the following exemption: “No employer shall be deemed to have violated subsection (a) by employing any employee of a retail or service establishment for a workweek in excess of the applicable workweek specified therein, if (1) the regular rate of pay of such employee is in excess of one and one-half times the minimum hourly rate applicable to him under section 6, and (2) more than half his compensation for a representative period (not less than 1 month) represents commissions on goods or services.” 29 U.S.C. section 207(i).

To be “a retail or service establishment,” it must engage in the making of sales of goods or services, 75 percent of its sales of goods or services, or of both, must be recognized as retail in the particular industry, not over 25 percent of its sales of goods or services, or of both, may be sales for resale. 29 CFR section 779.313. Congress meant to limit the exemption to employees of traditional local retail or service establishments. Service establishments refer to such local enterprises as restaurants, hotels, barber shops, and repair shops. The Department of Labor’s regulations provide a list of establishments that qualify at 29 CFR section 779.320, and a list of those that do not at 29 CFR section 779.317.

Because of the limitation of the exemption to traditional local retail or service establishments, many well-paid commissioned employees do not qualify. This has led to several class action lawsuits by commissioned employees of financial services companies. Merrill Lynch agreed to pay $37 million to settle claims by its brokers. Citigroup agreed to pay $98 million to settle claims by its financial advisors.

The California wage orders exempt any employee whose earnings exceed one and one-half times the minimum wage if more than half of that employee’s compensation represents commissions. There is no limitation to local retail or service establishments as there is under the FLSA. However, the commissioned employee exemption only applies to employees who are involved principally in selling a product or service. See Areso v. CarMax, Inc., 195 Cal.App.4th 996 (2011).