Commission pay is when a worker’s wages depend on their revenue-producing activities for the business. An individual commission is money paid after the employee completes a particular task or service.
Minimum Wage Laws
No matter how commission pay is set up, employers should understand what the minimum wage laws require. For workers paid in commissions, no law is violated more often than the minimum wage.
You can not only pay an employee on commission. Employees are required by federal and state laws to be paid at least minimum wage for each hour worked.
The current federal minimum wage is $7.25 an hour. But many states use a higher standard: they’ve passed their own minimum wage laws. The law that applies to the job is the one in the state where the work is performed. It doesn’t matter where the worker lives.
For example, an employee working remotely in Virginia is subject to Virginia’s minimum wage law. As of January 2023, that standard is $12 an hour.
See the U.S. Department of Labor’s website for a chart with each state’s current minimum wage standard.
When wages are a mix of commission and hourly pay, sometimes the employee does not get the minimum wage for all hours worked. Make sure the numbers work. Commissions should be paid under a written plan.
Written Commission Agreement
Under federal law, no written commission agreement is required. The same is true in the District of Columbia, Maryland and Virginia. A written commission agreement is always a good idea.
By putting the details in writing, businesses can make sure everyone involved understands how the commission plan works. When both sides clearly understand how commission will be paid, there should be fewer misunderstandings. It should also be easier to administer the commission plan.
If more than one person will earn commissions, draft a commission plan covering the entire business. Individual employees should also get a copy of their own agreement.
If there’s just one commission employee, the commission terms can be in the offer letter or a separate agreement. Either way, they should be in writing.
The commission plan should include: How commissions are earned, the definition of how the commission is calculated, how often commissions are paid, and when commission payments stop after the worker quits or is fired.
Disagreements often arise over whether workers have to be employed at the time of the payout to collect commission.
If a fired employee has met all the terms of the commission agreement, the employer must pay the commission. No matter how badly the company wants to keep that money for itself, if an employee satisfies every detail, the worker gets the commission. Meet the requirements, get the money.
Care is needed when taking deductions. The law restricts taking money out of an employee’s check. The business can take deductions for taxes and things like wage garnishments. Holding back pay or a percentage of the final check to cover unreturned equipment may seem like a reasonable business decision. But it violates the wage laws in some states.
In Virginia, if an employee fails to return property, the employer can’t deduct it from pay unless the employee authorizes it in writing. When and if this written consent is given, it must be simultaneous.
The general rule is the same in Maryland and the District of Columbia. When an employer wants to take the value of unreturned property, an employee must agree to this in writing, and that must happen at the same time the charge is deducted from the paycheck.
You can change a commission plan as long as it is changed prospectively. The employer must also notify employees of the change.
The commission plan can’t take earned commissions off the table. Once an employee finishes every step required to earn a commission, that’s their money. Once earned, commissions count as a wage, so they can’t be taken back or changed if the employer is unhappy with later events. Commissions due must be paid.
Paid Time Off or Sick Leave
Under federal law, employers are not required to give paid time off or sick leave to commissioned employees. In some states, employers must offer paid sick leave.
The District of Columbia has one such law: the Accrued Sick and Safe Leave Act. When leave is needed, this paid time off is available for employees to use when they have an illness, care for a sick family member, or need time off because of domestic violence or sexual abuse.
Virginia generally does not require employers to offer paid time off. Exceptions exist for home health care workers and certain state government employees.
When an employee leaves, they might have unused paid time off left on the books. Some states require businesses to cash out the unused PTO. Explain clearly what happens when employment ends.
Virginia law does not require employers to cash out unused PTO time. If a business has a policy of paying out accrued but unused vacation or sick leave on the last check, that policy must be followed.
In both the District of Columbia and Maryland, unused PTO is cashed out if the employer’s policies do not address the issue. When the employment ends, the PTO is paid.
Laws are more employee-friendly in the District of Columbia and Maryland. The environment is much different in Virginia, as the state has shifted toward Democratic. Laws on employment relationships are changing.
When an employee takes FMLA leave, commission is probably still owed if the time off is for a qualifying reason and the commission plan continues to include employees on leave. If commissions were fully earned before the FMLA leave, they are still due, regardless of the time missed from work. Commission should not be reduced just because the employee was not in the office.
Consider an employee who’s paid a set percentage of all invoices from clients she brings in. Those payments should keep coming in while the employee is out on leave.
It’s a good idea to clarify commission compensation in advance. When employees know how much they can expect from leave, it avoids misunderstandings later on. Don’t make assumptions. Write them down.
The wage and hour laws, and how the courts handle cases under the laws, mostly favor employees. Write clear commission plans and pay fairly and on time. These practices can save money on unpaid wage lawsuits or costly FMLA litigation. When the rules are applied fairly and consistently, the risk of lawsuits drops.
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