Commissioned Salesman Might Be Owed Overtime Even Though He Earned More Than $70,000

Author: Michael Cardman, XpertHR Legal Editor

April 18, 2017

As a recent appeals court ruling illustrates, paying an employee a lot of money does not necessarily guarantee that he will be exempt from overtime requirements.

Sean Freixa earned more than $70,000 in salary and commissions during a roughly one-year period between 2013 and 2014. Nevertheless, the 11th Circuit Court of Appeals ruled in Freixa v. Prestige Cruise Servs. that he may have been entitled to overtime pay during certain workweeks.

The court's ruling involves some of the more arcane provisions of the Fair Labor Standards Act (FLSA) and shows how employee classification is seldom cut and dried.

Freixa sold cruises for Prestige Cruise Services, LLC. He worked an average of 60 hours per week, for which he received a fixed salary of $500 per week (or $26,000 per year) plus commissions that were calculated monthly based on how many cruise bookings he sold. For one month's work, Freixa earned almost $9,000 in commissions; for other months, he earned no commissions at all.

Under the FLSA, retail and service establishments do not have to pay overtime to commissioned salespersons as long as:

  • Their regular rate of pay is at least one and one-half times the minimum wage (or $10.88 per hour) for every hour worked in a workweek in which overtime hours are worked; and
  • More than half of their total earnings in a representative period consist of commissions.

Freixa sued his employer for overtime, alleging that his compensation fell below the $10.88 threshold in certain workweeks when he received no commission.

The FLSA generally requires that an employer calculate an employee's regular rate of pay on a weekly basis. But the district court "found it difficult to determine the exact weeks during which Freixa earned commissions," so it invoked a federal regulation that allows the 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.

On this basis, the district court divided Freixa's entire pay for the year across every hour in every week he worked - assuming 60 hours per week - and arrived at an average hourly rate of $23.45. The district court awarded summary judgment in favor of the cruise service.

But on appeal, the 11th Circuit found that the district court misapplied the regulatory exception for allocating commissions. Commissions must be applied across weeks within the computation period in which they were earned, which in the Frexia case was a month, not an entire year.

As a result, there remains a genuine dispute about a material fact. The 11th Circuit reversed the district court's summary judgment and sent the case back for further proceedings.