I have a few questions:

First off this site has really helped me for a while and I would like to say thanks!

I work for a financial services company in CA and we are under IWC 4. We pay our employees an hourly rate (like $10) plus commission (25% of gross sales). We pay overtime of course, but I was wondering about the commissions. Do the commissions get factored as the regular rate of pay?

Example 1:

The reason I ask is because I recently had a employment lawyer tell me that I shouldn't just pay and hourly rate plus commissions without factoring the commissions in with the hourly pay as "regular rate of pay". But I was always under the impression that if an employee works 50 hours a week, where 40 hours are at $10 ($400) and the 10 are at the overtime rate of $15 ($150) they earn $550 that week on that alone. Then they earned let's say $250 in commissions (25% of $1000 sales) so then their total pay should be $800, right? This apparently was 'ok' according to a previous lawyer I had previously consulted with.

Example 2:

But this other lawyer's saying something to the tune of the $250 commissions should be added to the $400 ($10/hr @ 40 hrs) to get $650. Then the 'real' straight time hourly rate is $16.25. The OT on $16.25 is $24.38, so the 10 hrs of OT is actually worth $234.80. Then this employee actually made $884.80.

So where in Wage Order 4 does it say this? Or somewhere on the DOL site that I missed? I've worked for places like Radioshack and Sprint (same wage order, not considered merchantile industry) and they are doing the same thing, where people get an hourly rate and can work all the OT they can handle, and get commission off the stuff they sell. Same senario here, but instead of phones we sell services.

Anyone have any input? I had one laywer tell me hourly + commission in the first example is fine but another lawyer says it's not (the second example). And to add the latter says that bonuses must also be considered in the RRP calculation.

Granted the commissions are from their sales, sales is their primary duty (like in retail) and bonuses are based on performance (top salesperson, most volume/revenue, etc). A little help please!

The way I figure (DAW or Patty will correct me if I am wrong) is that the employee earned $500 straight time (50 hrs @ $10). Add the commission ($250). Divide that amount by hours worked to get the average rate of pay ($15). Ten hours OT times $7.50 = $75 (you have already accounted for the straight time portion owed for the OT hours).

Total pay due -- $825.

Scott's calculation looks right to me.

http://www.dol.gov/esa/whd/regs/compliance/whdfs23.pdf

"Earnings may be determined on a piece-rate, salary, commission, or some other basis, but in all such cases the overtime pay due must be computed on the basis of the average hourly rate derived from such earnings. This is calculated by dividing the total pay for employment (except for the statutory exclusions noted above) in any workweek by the total number of hours actually worked."

Thanks for the great responses guys. As usual great info. Scott B, where did you get that calculation? Is there a website that I can reference? I did find this from a previous post:

Link: http://www.laborlawtalk.com/showthread.php?t=188222&highlight=hourly+commission

49.2.1.2 Piece Workers, Production Bonus Workers or Commission Workers : (See O.L.
1993.02.22-1, 1988.06.15, 1988.03.28, 1994.06.17-1; 1988.07.14, 1987.02.17). Either of
the following two methods can be used to determine the regular rate for purposes of
computing overtime compensation:
1. Compute the regular rate by dividing the total earnings for the week, including earnings
during overtime hours, by the total hours worked during the week, including the overtime
hours. For each overtime hour worked, the employee is entitled to an additional one-half the
regular rate for hours requiring time and one-half and to an additional full rate for hours
requiring double time. This is the most commonly used method of calculation.
2. Using the piece or commission rate as the regular rate and paying one and one-half times this
rate for production during overtime hours. This method is rarely used.

So it looks like method one is a winner. This now makes sense! I can see that the commissions are non-discretionary seeing that it's part of the job, so would I also have to add in things like production bonuses and the like? What about profit bonuses, are they part of the calcuation (only given if profits pass a certain level each quarter).

It makes me wonder how all the various retail places like Radioshack and Sprint can still be doing it wrong. My friend works for AT&T and they do not use their commissions to determine the 'true' hourly rate for their OT. I wonder why none of those places are doing what is suggested here, and why are they still in business? How are they getting away with it?

The retail establishments fall under a possible exception to the normal overtime rules.

http://www.dol.gov/esa/whd/regs/compliance/whdfs20.pdf

I'm aware of the 7(i) exemption and retail is certainly not covered. I've even tried to use this where I work, and the comissions earned are never 1/2 or greater in terms of the total salary. Same at Radioshack, someone makes like $10/hr and gets like $10 spiff per phone, 30% commission on warranties, and their commissions never meet the money test (usually they'll make like 5-600 in salary and like $100 in comissions per week, and monthly it's the same thing).

What about draw versus commission? Would that be a better fit. Thanks for all your help, DAW and everone else!

A draw is, simplistically speaking, just an advance against wages. It does not affect the overtime calculations under the FLSA.

Oh I see, thanks PattyMD! You guys are awesome, thanks for the help!