Labor laws for commission-only employees can be challenging to understand, let alone follow. These laws affect industries where staff compensation is performance-based, like sales or real estate.
To ensure a positive and healthy work experience, employers and employees must work together to build a system that promotes fair treatment and state compliance. In this guide from Mosey, we’re answering the 16 most common questions about commission-only employment.
1. What Is a Commission-Only Employee?
Commission-only employees are workers who earn wages based exclusively on their performance. Their earnings are tied to sales and other measurable outputs rather than the number of hours they work each day. Some examples of commission-only employees include travel agents and recruiters.
The legal definition of commission-only employment varies by jurisdiction. However, employees are usually considered commission-only when their pay depends on achieving specific goals or meeting certain quotas.
While there is some overlap, it’s important to note that commission-only employees and independent contractors are not the same. An important distinction lies in their employee classification. Employees working for commission are bound by company policies, while independent contractors typically enjoy greater levels of autonomy.
2. Are Commission-Only Employees Entitled to Minimum Wage?
Under the Fair Labor Standards Act (FLSA), most employees are entitled to minimum wage. However, those in commission-only roles, specifically within the retail or service industries, can be exempt if they meet certain criteria.
First, they must earn more than 50% of their income from commissions. Second, their hourly pay rate must be at least one and a half times the federal minimum wage.
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In these industries, commissions are often expected to meet — or exceed — the minimum hourly rate. Exempt employees are not bound by FLSA regulations regarding minimum wage and overtime pay and are not eligible for either.
Instead, exempt employees are paid a predetermined salary or fee on a set schedule. They receive this payout no matter how many hours they work during a particular pay period or how well they perform.
Some states have very strict wage laws. California, for example, mandates that commission-only employees earn at least the equivalent of the state minimum wage ($16 per hour) for all hours worked.
Sometimes, if commissions do not meet minimum wage standards, employers may need to make up the difference. Failure to do so could result in fines and other legal penalties.
3. What Are the Differences Between Salaried and Commission-Only Employees?
Salaried employees receive fixed incomes regardless of performance, while commission-only workers must rely on their ability to meet sales or production targets. As a plus, commission-only roles often provide more flexibility, allowing employees to set their own schedules.
Salaried positions may come with stricter hours and obligations. However, salaried employees usually enjoy more comprehensive benefits and have greater protections under labor laws — like guaranteed minimum wage — while commission-only employees often have fewer assurances.
4. How Are Commission-Only Employees Classified for Tax Purposes?
Commission-only employees typically receive W-2 forms, as their earnings are subject to payroll taxes.
When tax season comes around, they’ll receive a W-2 form in the mail, just like a salaried employee. Commission-only employees can also claim deductions on their returns for work-related expenses not reimbursed by their company.
Employers must provide accurate tax documentation to maintain compliance. Processing can be delayed if an employee is misclassified or if any of their income information is incorrect.
5. What Are the Legal Limits on Working Hours for Commission-Only Employees?
The FLSA does not limit the number of hours commission-only employees can work. However, state laws may include specific restrictions for these roles. For example, several states require employers to allow breaks for meals and rest, even for commission-only workers.
Employers must comply with labor laws in the states where their company operates. They should monitor individual work schedules to stay on top of occupational safety laws and prevent staff burnout.
6. Do Overtime Laws Apply to Commission-Only Employees?
Commission-based workers are typically entitled to overtime pay unless classified as exempt under the Fair Labor Standards Act. Non-exempt workers must be compensated one and a half times their regular hourly rate for hours worked beyond 40 in a single week.
Employers must remember to calculate overtime pay based on employees’ total earnings, including commissions. Additionally, states like New York and California have extensive overtime protections that often exceed federal requirements.
7. Are There Protections Against Unfair Deductions From Commissions?
Employers cannot deduct costs like merchandise returns, order cancellations, or operational expenses from commissions unless explicitly stated in an employee’s contract. Issues can arise when employers deduct for unexpected costs, such as product defects or marketing fees.
Employees should review their agreements closely before signing to avoid confusion or surprises. Labor boards and arbitration processes are available for workers who wish to dispute unfair deductions, and detailed documentation is required for resolving these cases.
For employers, clear company policies and a proactive approach to compliance are essential to avoid this arbitration and other legal issues.
8. How Do Termination Policies Affect Commission-Only Employees?
Sometimes, state law requires a notice period for terminating commission-only employees. Employers must initiate the payout of earned commissions during the termination period, and employees are typically entitled to commissions earned before termination, provided all contractual obligations were met.
Employers can withhold unpaid commissions if the employee fails to meet outlined conditions (e.g., finalizing a sale). However, these terms must be clearly defined and in accordance with labor laws. Former employees can file complaints or lawsuits to recover any amount owed to them, so employers must be diligent during termination.
9. Do Commission-Only Employees Qualify for Benefits?
Unfortunately, commission-only employees are often not entitled to traditional benefits like health insurance, 401k plans, and PTO unless they are specifically outlined in their contracts. Some states require employers to extend benefits to every worker, regardless of their pay structure.
Some companies offering full-time positions will include commission-only roles in their benefits packages as an added perk, regardless of state requirements. If not, employees can negotiate benefits as part of their employment terms, which is especially common in more competitive commission-only industries.
10. How Can Employers Ensure Compliance With Labor Laws?
Employers should create clear, detailed company policies for commission-only roles. These policies should address pay structure, overtime rules, pay deductions (if applicable), and dispute resolution processes. They should be written in a formal document and safely stored in a physical or digital location that is easily accessible to both parties.
Additionally, regular policy audits can identify potential compliance issues before they become a dispute. Employers should stay up-to-date on changes to federal and state labor laws, adjusting existing policies as needed. They should also educate managers and supervisors about labor laws affecting commissioned team members.
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11. Can Commission-Only Employees Be Required To Represent One Company Exclusively?
Non-exclusive agreements allow employees to work for multiple companies simultaneously, while exclusive agreements restrict representation to a single employer. For an exclusivity clause to be legally binding, it must be explicitly stated in the employment contract.
Exclusivity agreements must be reasonable, as overly restrictive clauses can be challenged in court. Employers and employees should openly discuss agreements and highlight potential conflicts of interest so those issues can be addressed and clarified in writing.
12. What Are the Legal Implications of Non-Compete Agreements?
Non-compete clauses can restrict commission-only employees from working for competing companies after leaving a role. These clauses are typically only effective for a set period of time, which means any employee bound by one would be released as soon as it expires.
Non-compete clause enforceability varies by state. Additionally, employers must draft agreements that protect business interests without unfairly limiting employees’ career opportunities. In lieu of strict non-compete clauses, employers can consider non-solicitation agreements (NSAs) or non-disclosure agreements (NDAs) to safeguard their companies.
13. How Are Expenses Handled for Commission-Only Employees?
Labor laws may require employers to reimburse business expenses (e.g., travel), especially if the expense results from a necessary function of the role. Employees can generally deduct expenses that are not reimbursed on their tax returns, although conditions may apply.
Outlining clear policies regarding which expenses employees are allowed to request reimbursement for and the process for receiving it can help prevent financial disputes between companies and their employees.
14. What Is the Role of Training for Commission-Only Employees?
Employees must be compensated for all mandatory training, even if they are commission-based. Training is not considered voluntary if it prevents an employee from properly and safely executing their professional duties.
Employers typically cover the costs associated with training, but some companies may request repayment if the employee leaves prematurely. Those terms must be documented in the employment agreement to be legally binding and enforceable.
Additionally, workers in commission-only roles often benefit from continuous training. Employers sometimes offer incentives for employees who complete relevant certifications in addition to those that are required.
15. Are Commission-Only Employees Covered by Anti-Discrimination Laws?
Federal laws like Title VII of the Civil Rights Act protect commission-only employees from workplace discrimination based on race, gender, religion, and other characteristics. Any employees facing discrimination can file their complaints with the Equal Employment Opportunity Commission (EEOC) or a state labor agency.
Every employer should enforce a zero-tolerance policy for discrimination and take the time to investigate claims. Employers must also foster an inclusive work environment, offering equal opportunities for employees to succeed, regardless of their background or classification.
16. How Do Labor Laws Address Changes in Commission Policies?
Employers are required to provide written notice when changing commission rates or pay structures. Unannounced changes may violate local labor laws or pre-established employee contracts. Workers have the right to challenge these adjustments, especially if they result in a reduction in earnings.
Detailed documentation and clear communication are instrumental in resolving these types of disputes — or preventing them altogether. Additionally, state laws typically regulate how and when employers can modify their commission policies.
Maintain State Compliance With Mosey
Labor laws can be complicated for commission-only employees, and remaining compliant requires careful consideration from employers and workers alike.
With Employee Handbooks by Mosey, you can build a multi-state handbook in minutes to distribute to all of your employees. Fully compliant in all 50 states, Employee Handbooks make it easier than ever to monitor changes in labor laws, automatically update your policies, and notify employees — including commission-only workers — of relevant changes.
Ready to see for yourself? Schedule a demo with Mosey and learn how we can elevate your compliance efforts today.
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