Overtime for Production-Based Workers – Common Labor Violations

February 13, 2018

Federal law mandates a minimum hourly wage plus 1.5 of the wage for hours over 40 in a 7-day workweek. But many workers are not paid by the hour, but based on how quickly they complete tasks and assignments.

For example:

• Commercial painters paid by jobs completed
• Phlebotomists paid by tests completed
• Telemarketers paid with bonuses per call or sale completed.
• Seamstresses paid per dress completed.
• Carpet cleaners paid per room.

Overtime for “Piece-Rate” Workers

Pursuant to the Fair Labor Standards Act (FLSA), The United States Department of Labor regulations provide that an employer who pays employees on a “piece-rate basis” must pay them “one-half th[eir] regular rate of pay.” By requiring employers to pay an additional premium for each and every hour worked over 40, the law deters employers from overworking their employees.

However, many employees paid by production are not paid any additional rates for work completed over 40 hours in a week. Rather, they earn the same fixed rate for each unit of production regardless of how many hours it takes the employee to complete. Common examples include mechanics paid based on how many repair jobs they complete, and cable installers paid based on each cable set-up they install.

The justification employers use for this practice is that some production-based payments may qualify as “commissions,” even if the payments are not described as such to the employee or on the paystub.

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The Commission Exemption

The “commission exemption” to federal overtime law provides that employers need not pay premium rates for hours worked over 40 in a workweek if:

1) the employee’s pay averages out to at least $10.88 per hour (1.5 times the federal minimum wage); and

2) more than half of the employee’s total pay (considered over a “representative period” of at least one month) consists of commissions.

In order for an employee to be exempt under the commission exemption, he or she must be employed in a “retail or service establishment,” which the Department of Labor has described as a business that:

• sells goods or services to the general public;
• serves the everyday needs of the community in which it is located; and
• performs a function which is at the very end of the stream of distribution, disposing in small quantities of the products and skills of such organization and does not take part in the manufacturing process.

While “commissions” are typically associated with employees directly engaged in sales, courts have found employees exempt under this exemption even where their duties are focused on production and they do not directly engage in sales.

When Does Production-Based Pay Qualify as a “Commission”?

As employers rely on increasingly broad understandings of the commission exemption, courts have grappled with how to differentiate true commission-based systems from piece-rate pay, which as noted above, must include overtime pay.

Generally, production-based pay can qualify as a commission if 4 factors apply:

• First, a commission is either a percentage or proportion of the ultimate price passed on to the consumer;
• Second, a commission is decoupled from actual time worked, so that there is an incentive for the employee to work more efficiently and effectively;
• Third, the type of work is such that its “peculiar nature” does not lend itself to a standard eight-hour work day.
• Fourth, the compensation system must not offend the purposes of the federal overtime laws, i.e. if the workers’ pay is close to the minimum wage and/or the employer requires consistent overtime work.

Where any of these factors do not apply, the employer’s failure to pay overtime may be in violation of federal overtime law, entitling you to recover your wages, potentially in a “collective action” lawsuit in which other workers challenge the same violation.

The commission exemption has been found inapplicable in the following sorts of cases:

Where work assignments were not given out based on speed of production;
• installers who were paid a flat fee per installation;
• a compensation scheme under which the employee was guaranteed that he would be compensated each pay period for a set number of “flag hours” at a certain rate, with any additional hours being compensated at a sharply decreased rate.
• “spiffs” offered to encourage their salespeople to push particular products, which were set based on the Defendants goals, and not related to the value of the products.

Various states, like New York, Illinois and California have wage and hour rights that may extend additional protections beyond what the Fair Labor Standards Act provides. If you are paid by your production, rather than by the hour, you should check your paystubs to see if you are paid overtime. If not, your employer may be wrongfully claiming you as a commission-exempt employee, and you should consult the experienced wage-and-hour attorneys at the JTB Law Group.