Inside Sales employees: how is overtime calculated?

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Recently I wrote about the employees who are considered “inside sales” and when they get overtime pay. How to calculate their overtime pay is also a complicated and controversial matter.

Some employers pay their inside sales staff an hourly wage, plus commissions. In this case, when overtime hours are worked (more than 40 in a week), the commissions must be incorporated into the weekly wage and overtime paid on all of it. The overtime cannot be limited to one and a half times the hourly wage.

Other employers (including Radio Shack, GNC) pay these employees on the “fluctuating work week” method of overtime pay. This formula pays a fixed salary, then calculates overtime by dividing the salary by the total hours worked in the week. This method results in a payment that some refer to as “Chinese Overtime” or “Half Time Overtime” and employees don’t like it. Employers like it for obvious reasons (it costs them less than 1/3 what normal overtime costs).

A question arises whether this method of paying overtime can be used when the employee gets a salary and commissions. Employees’ lawyers say no, since the varying commissions make the weekly pay vary (in violation of the “fixed” weekly salary rule). Employers’ lawyers say yes since the base salary is fixed and commissions aren’t a part of the weekly salary.

I believe that the fluctuating work week method of paying overtime should not be used when the employee is paid commissions in addition to salary. The commissions push the employee to work long hours, since the more they work, the more they sell. This incentive to work long hours is contrary to the idea behind the fluctuating work week since the more you work, the smaller your overtime premiums become. I don’t believe that an employer should be able to pay the cheaper ½ time overtime while simultaneously incentivizing its employees to work long hours. I believe this overtime scheme should be limited to employees whose only non-overtime pay is a fixed weekly salary.

The U.S. Department of Labor wrote, in 2011, that bonuses are “incompatible” with the fluctuating work week method of overtime pay. It wrote that it was against the expansion of this payment scheme:

Finally, while the proper use of the fluctuating workweek method of pay results in an employee being paid time and one-half of the employee’s regular rate for overtime hours, the Department is cognizant that this method of pay results in a regular rate that diminishes as the workweek increases, which may create an incentive to require employees to work long hours. The Department does not believe that it would be appropriate to expand the use of this method of computing overtime pay beyond the scope of the current regulation.

Lawsuits are presently on file in federal courts in Connecticut and Massachusetts placing these issues in front of judges. It will be an interesting year.