Commission-Only Plans: Are You Illegally Skipping Overtime on Non-Discretionary Commissions?
Learn when non-discretionary commissions require overtime, how to calculate it correctly, and structure plans that pass audits.
You can absolutely build aggressive, commission-only sales plans in the U.S.—but if you ignore overtime on non-discretionary commissions, your “high-performance” comp model can quietly generate massive wage claims, audits, and class actions. This guide walks you through what the law really says, how to calculate overtime correctly, and how to redesign your plan so it rewards performance without violating the Fair Labor Standards Act (FLSA).
Understanding Commission-Only Plans and the Role of Non-Discretionary Commissions
First key point: the FLSA does not prohibit commission-only pay. It does, however, require that most non-exempt employees receive at least the applicable minimum wage for all hours worked and overtime at 1.5x the regular rate for all hours over 40 in a workweek—no matter if they are paid by salary, hourly rate, piece rate, or commissions.
In that framework, a crucial distinction appears:
- Non-discretionary commissions: promised in advance, formula-based, expected by the employee (e.g., 5% of sales, tiered commission grids, SPIFFs tied to defined targets). These must be included in the regular rate for overtime.
- Discretionary payments: truly optional, not promised, awarded at the employer’s sole discretion and not tied to a specific formula or expectation. These may often be excluded from the regular rate—if they meet strict criteria.
For commission-only employees who are not validly exempt (for example, they fail the salary basis test or duties test, or work in roles that don’t qualify), the employer must:
- Ensure total weekly earnings (including commissions) average at least the applicable minimum wage for all hours worked; and
- Pay additional overtime premium based on a regular rate that includes non-discretionary commissions.
Regular Rate Basics for Commission-Only Structures
The regular rate is the total compensation for the week (including non-discretionary commissions) divided by the total hours worked in that week. Once you have the regular rate, overtime for non-exempt employees is generally:
Overtime premium = 0.5 × regular rate × overtime hours
Why 0.5? Because the employee’s total straight-time earnings (including commissions) already cover the “1.0x” portion for all hours; the employer owes an extra “0.5x” for each overtime hour.
Total non-discretionary commissions in the week ÷ total hours = regular rate. Multiply by 0.5 and by all hours >40 to find additional overtime due.
Legal and Practical Rules: When OT is Triggered on Non-Discretionary Commissions
Now we move from concept to enforceable rules. Under the FLSA and corresponding guidance, key principles apply to commission-only plans:
1. Coverage and non-exempt status
- If the employee is non-exempt, commission-only pay does not remove the overtime obligation.
- To treat someone as exempt (e.g., executive, administrative, professional), you must meet:
- Duties test (actual job content, not job title), and
- Salary basis + salary level thresholds (which pure “commission-only” often fails).
- Outside sales exemption is a narrow but real exception: true outside sales employees paid by commission may be exempt from overtime, but misclassification here is common and risky.
2. Non-discretionary commissions must be allocated to workweeks
Commissions often cover a month or quarter of sales. For overtime purposes, they must be allocated back over the workweeks in which the underlying sales or work occurred. Once allocated, they increase the regular rate for those weeks, creating additional overtime obligations.
3. Interaction with federal, state, and local rules
- The FLSA sets a floor. States and cities may require:
- Daily overtime (e.g., after 8 hours/day),
- Higher minimum wages,
- Stricter rules on when commissions are “earned” or due.
- Commission-only plans must be aligned with the most protective applicable rule.
4. Retail & service exemption and other traps
Some employers try to rely on special commission-based exemptions (such as the retail/service 7(i) exemption). These are technical, rarely apply by accident, and demand precise documentation. Treat them as advanced strategy, not default.
Step-by-Step: How to Calculate Overtime on Non-Discretionary Commissions
Here’s a practical framework you can apply or hand directly to your payroll/HR team.
Step 1 – Define the earning period
Identify the period the commission covers (weekly, biweekly, monthly, quarterly). Your plan document must clearly state this.
Step 2 – Allocate commissions to workweeks
If a monthly commission is $2,400 and the employee worked 4 equal weeks, allocate $600 to each week (or use a more precise allocation if hours differ by week).
Step 3 – Compute the regular rate for each week
- Add all non-discretionary commissions allocated to that week.
- Add any other earnings (draws, recoverable advances, minimum wage adjustments).
- Divide the total by total hours worked that week (including overtime hours).
Step 4 – Apply the 0.5 overtime premium
- Determine overtime hours (hours > 40 in the week, or stricter state rule).
- Overtime premium due = 0.5 × regular rate × overtime hours.
Step 5 – Build automated “true-up” logic
Each time commissions are paid, your system should:
- Revisit the covered weeks,
- Recalculate the regular rate with the added commissions,
- Issue any retroactive overtime as a separate line item.
Week hours: 50 | Commission allocated: $1,000
Regular rate = $1,000 ÷ 50 = $20.00
OT hours = 10 → Extra OT due = 0.5 × $20 × 10 = $100 (on top of straight-time already covered)
Examples and Practical Models You Can Adapt
“You earn 12% of collected sales each week. All commissions are non-discretionary and included in your overtime rate. Overtime is paid at 1.5x your regular rate (including commissions) for hours over 40.”
“Monthly commissions are allocated to each week based on your hours worked and are used to recalculate your regular rate. We pay any additional overtime owed when the commission is paid.”
“You receive a weekly draw credited against future commissions. If your commissions do not cover the draw, you still keep at least minimum wage plus any overtime due on your total earnings.”
Common Compliance Mistakes with Commission-Only Overtime
- Ignoring OT because “they signed a commission-only agreement” – contracts cannot waive statutory overtime.
- Treating all commission programs as discretionary – if it’s formula-based or promised, it’s non-discretionary.
- Failing to allocate monthly/quarterly commissions back to workweeks – leads to chronic underpayment of overtime.
- Using draws that drop below minimum wage or never true-up – creates minimum wage and OT exposure.
- Misusing exemptions (executive/admin/outside sales) to avoid OT – duties and salary tests must be met in reality.
- No documentation of how the regular rate is calculated – impossible to defend in audits or litigation.
Conclusion: Turn Your Commission Plan from Liability into a Defense Weapon
Commission-only structures are powerful tools to drive performance—but every non-discretionary commission you promise is part of the overtime story. When you clearly define your plan, allocate commissions by week, recalculate the regular rate, and pay the 0.5 overtime premium on top, you:
- Protect the business from back pay, double damages, and class actions,
- Give employees transparent proof they are being paid fairly, and
- Transform your commission plan into strong evidence of compliance when regulators, auditors, or plaintiff’s lawyers start asking questions.
Review your commission-only plans now: if overtime on non-discretionary commissions is not built into your formulas, systems, and written policies, the safest assumption is that you are underpaying—and that exposure grows every pay period.
1. Confirm if the role is truly non-exempt. If yes, commission-only does not remove overtime obligations.
2. Treat all formula-based, promised commissions as non-discretionary and include them in the regular rate calculation.
3. Allocate commissions to the workweeks in which the sales/activity occurred (weekly, monthly, or quarterly true-up).
4. Compute the regular rate: total earnings (commissions + other non-discretionary pay) ÷ total hours in the week.
5. Pay overtime: add a 0.5x premium on the regular rate for each hour over 40 (or stricter state rule) for non-exempt employees.
6. Keep written commission plans, time records, and clear formulas to survive audits and litigation.
7. Regularly review state/local rules, exemptions, and plan language to avoid misclassification and underpayment claims.
1. Does a signed commission-only agreement cancel overtime rights?
No. Employees generally cannot waive statutory overtime. If they are non-exempt, overtime must be paid on qualifying commissions regardless of what the contract says.
2. Are all commissions considered non-discretionary for overtime purposes?
Most commissions based on published formulas, quotas, or sales results are non-discretionary and must be included in the regular rate. Only truly optional, unexpected payments may be treated as discretionary.
3. How do we handle monthly or quarterly commissions when calculating overtime?
You must allocate those commissions back over the workweeks in which the underlying work or sales occurred, recalculate the regular rate for those weeks, and pay any additional overtime as a separate true-up.
4. Can outside salespeople on commission be exempt from overtime?
Yes, but only if they meet the strict outside sales criteria (primarily working away from the employer’s place of business making sales). Inside sales or mixed roles often do not qualify and remain overtime-eligible.
5. What happens if the employee’s commissions do not reach minimum wage?
The employer must supplement pay so that total earnings meet or exceed the applicable minimum wage for all hours worked, plus any overtime premiums owed.
6. How risky is it to ignore OT on commissions for just a small sales team?
Very risky. A few mispaid employees can lead to multi-year back pay, doubled damages, penalties, and class/collective actions, especially if payroll records and formulas are unclear.
7. What practical controls should we implement to stay compliant?
Use clear written plans, track all hours worked, configure payroll to include non-discretionary commissions in the regular rate, run periodic audits with counsel, and train HR/finance so no one “switches off” OT for commissioned staff.
- Regular rate principle: All non-excludable remuneration (including non-discretionary commissions) must be included when calculating the regular rate used for overtime.
- Commission treatment: Commissions linked to sales performance or measurable targets are considered payment for hours worked and are integrated into overtime calculations.
- Allocation duty: Deferred or periodic commissions must be reasonably allocated across the workweeks in which the underlying work was performed, with retroactive overtime adjustments when necessary.
- Exemptions as exceptions: Executive, administrative, professional, retail/service, and outside sales exemptions require strict tests; commission-only pay alone does not create an exemption.
- Anti-evasion rule: Employers cannot avoid overtime by artificially structuring pay (e.g., very low “base rate” plus high commissions) that ignores the true regular rate calculation.
- State overrides: Where state or local law is more protective (daily OT, higher minimum wage, special commission statutes), those standards prevail and must be incorporated into the plan.
In practice, compliant commission-only models depend on accurate timekeeping, correct classification, documented formulas, and systemized overtime true-ups embedded in payroll routines.
Commission-only strategies can drive high performance and align incentives, but they are safe only when overtime on non-discretionary commissions is treated as a standard, automatic component of payroll—not an afterthought. If your current plan does not expressly address how commissions affect the regular rate, how they are allocated by workweek, and how overtime true-ups are calculated, you should assume there is exposure and move quickly to correct it.
Before implementing or revising any commission-only plan, review the structure with professionals who understand wage-and-hour rules and your state’s specific requirements. Clear documentation and predictable calculations are your best defense against audits and lawsuits.
The information in this guide is for educational and informational purposes only and does not create an attorney–client relationship, does not constitute formal legal or payroll advice, and should not be used as a substitute for consultation with a qualified professional who can evaluate the specifics of your business, your workforce, and the laws in your jurisdiction.