Commissions Cannot be Allocated to Months Outside of Period Earned in Calculating Overtime

April 24, 2017

The U.S. Eleventh Circuit Court of appeals has held that federal law bars allocating a commission payment across weeks that fall outside the period in which the payment was earned.

The decision reversing a district court’s determination that an employee’s average hourly rate was above the exemption threshold so that he was exempt from overtime pay otherwise required by the Fair Labor Standards Act (FLSA or Act). To determine the employee’s regular rate, the district court divided his entire remuneration for the year he worked across every hour in every week he worked that year. However, federal regulations limited the court to allocating commissions across weeks within the time period in which the commissions were earned.

The employee sold cruises for the employer from December 7, 2013, to December 19, 2014. He received a fixed salary of $500 per week plus commissions. He earned over $70,000 in total compensation during his employment, 63 percent of which he received in commissions. The employer calculated commissions on a monthly basis and disbursed commission payments the following month. The employee sued the employer for overtime pay, alleging that his compensation in certain weeks fell below $10.88 per hour; the minimum amount an employee must receive to be exempt from federal overtime requirements. The parties agreed that the employee worked an average of 60 hours per week during his employment, but disagreed about the number of hours he worked in any individual week.

Commission allocation not possible or practicable. The district court acknowledged that the FLSA generally requires calculating the regular rate of pay on a week-to-week basis, but found it difficult to determine the exact weeks during which the employee earned commissions. So it invoked a federal regulation that permits use of a different “reasonable and equitable method” of calculation “if it is not possible or practicable to allocate the commission among the workweeks of the period in proportion to the amount of commission actually earned or reasonably presumed to be earned each week,” 29 C.F.R. § 778.120. Accordingly, it divided the employee’s entire remuneration for the year across every hour in every week he worked and arrived at an average hourly rate of $23.45. Because that rate exceeded the exemption threshold of $10.88 per hour, the district court awarded summary judgment in favor of the employer.

Here, the parties disputed whether the court used an acceptable method to calculate the regular rate of pay. The Eleventh Circuit concluded that it did not after determining that the district court misapplied a regulatory exception to the general rule about calculating overtime pay.

Regulatory exception. A district court ordinarily may not allocate compensation or hours across multiple weeks. Instead, it must calculate both compensation and hours for each individual week because “[t]he Act takes a single workweek as its standard.” The district court invoked a regulatory exception to the general rule for calculating overtime pay because the employee earned commissions monthly instead of weekly. That regulatory exception permits a district court to allocate commission payments across multiple weeks: “If it is not possible or practicable to allocate the commission among the workweeks of the period in proportion to the amount of commission actually earned or reasonably presumed to be earned each week,” a district court must adopt “some other reasonable and equitable method” to calculate the hourly rate.

The employer argued that the district court correctly calculated the employee’s regular rate of pay under this exception because of the difficulty of allocating monthly commissions over individual weeks. But that difficulty did not mean that the district court could allocate the employee’s commissions earned in one computation period to another computation period. Although the computation structure for the employee’s commissions made it impracticable or impossible to determine any particular week in which he earned commissions, the district court misapplied the regulatory exception for allocating commissions.

Rather, federal regulations limited the district court to allocating commissions across weeks within the time period in which the commissions were earned. Thus, when commissions are computed monthly, a district court may not allocate commissions earned in one month across weeks worked in other months. Although the regulations used the term “period,” the context makes clear that “period” means “computation period,” which, for the employee, referred to each month of his employment, not the whole year he worked. Thus, Section 778.120 limited the district court to allocating monthly commissions only among the “workweeks of the [computation] period”—that is, each particular month.

Accordingly, the district court erred when it allocated commissions earned in one month across weeks worked in other months, so that the judgment in favor of the employer was reversed.