Overtime for Commissioned Employees: The Retail and Service Exemption Explained
Quick Answer
Commissioned employees are usually owed overtime like anyone else. The main exception is the FLSA section 7(i) exemption, which applies only when all three tests are met: the employee works for a retail or service establishment, their regular rate in the workweek is more than one and one-half times the applicable minimum wage, and more than half of their pay over a representative period of at least one month comes from commissions. If any test fails in a week, overtime is due for that week.
Commissions are a powerful way to reward sales. Salespeople at car dealerships, furniture stores, appliance retailers, home improvement companies and many service businesses earn much of their pay through commissions. But a common and costly assumption is that commissioned employees don't get overtime. That's often wrong.
Under federal law, most commissioned employees are entitled to overtime unless they meet a specific exemption. The best-known is the section 7(i) exemption for commissioned employees of retail or service establishments. This guide explains the three tests in plain language, walks through examples, shows how to calculate overtime when the exemption doesn't apply and covers the mistakes that lead to back pay.
Note: This is general information, not legal advice. It covers federal rules under the Fair Labor Standards Act (FLSA) and Department of Labor regulations. State laws may be different or stricter. Have an employment attorney review your pay plans.
Do Commissioned Employees Get Overtime?
Usually, yes. The Department of Labor says that unless specifically exempted, employees covered by the FLSA must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay. Earnings may be determined on a piece-rate, salary, commission or other basis, but overtime must be computed on the average hourly rate derived from those earnings.
So commissions don't automatically remove overtime. They usually change how overtime is calculated, by becoming part of the regular rate.
The Section 7(i) Exemption: Three Tests
Department of Labor regulations at 29 CFR 779.412 describe when a commissioned employee of a retail or service establishment can be exempt from overtime. All three conditions must be met:
| Test | Requirement |
|---|---|
| 1. Retail or service establishment | The employee works for a retail or service establishment. |
| 2. Regular rate | The employee's regular rate of pay is more than one and one-half times the applicable minimum wage. |
| 3. More than half from commissions | More than half of the employee's compensation for a representative period (not less than one month) represents commissions on goods or services. |
Test 1: Retail or Service Establishment
For the 7(i) exemption, the regulations say a retail or service establishment is one where 75% of annual dollar volume of sales of goods or services (or both) is not for resale and is recognized as retail sales or services in the particular industry.
| Often retail or service | Often not |
|---|---|
| Car and RV dealerships | Wholesalers selling to other businesses for resale |
| Furniture and appliance stores | Manufacturers |
| Home improvement retailers | Businesses whose sales aren't recognized as retail in their industry |
| Many consumer service businesses | Distributors |
Whether a particular business qualifies can be complicated. The regulations include detailed rules and lists of businesses that may or may not be recognized as retail. If you're unsure, get legal advice.
Test 2: The Regular Rate Test
The employee's regular rate for the workweek must be more than one and one-half times the applicable minimum wage. Department of Labor regulations at 29 CFR 779.419 say that if this test isn't met in a particular workweek, there is no overtime exemption for the employee in that workweek.
| Federal minimum wage | 1.5 times minimum | Regular rate must be more than |
|---|---|---|
| $7.25 | $10.875 | $10.875 per hour (about $10.88) |
The regulation ties this test to the minimum wage that applies under section 6 of the FLSA, which is the federal minimum wage. State laws may have their own overtime rules and minimum wages, so check your state as well.
Test 3: More Than Half From Commissions
More than half of the employee's total pay over a representative period must come from commissions. The regulations at 29 CFR 779.417 say the representative period must be not less than one month and generally shouldn't be more than one year. The employer must document the period used and update it if it no longer reflects the employee's earnings pattern.
Examples
Example 1: Exemption Applies
A furniture store (a retail establishment) pays a salesperson $400 a week plus commissions. In a 48-hour week, she earns $900 in commissions, for $1,300 total. Her regular rate is $1,300 / 48 = $27.08, well above 1.5 times the federal minimum wage. Over the last month, commissions made up 70% of her pay. All three tests are met, so no overtime premium is owed for that week under the 7(i) exemption.
Example 2: Regular Rate Test Fails in a Slow Week
In a slow week, the same salesperson works 50 hours and earns $100 in commissions plus her $400 base, for $500 total. Her regular rate is $500 / 50 = $10.00, which is not more than $10.875. The exemption doesn't apply that week, so she's owed overtime: 10 hours x ($10.00 x 0.5) = $50.00 in overtime premium, for $550 total, assuming federal minimum wage applies. Her regular rate still meets the federal minimum wage.
Example 3: Not a Retail or Service Establishment
A distributor that sells mostly to other businesses for resale pays inside sales reps commissions. Because the business likely isn't a retail or service establishment, the 7(i) exemption likely doesn't apply. The reps are owed overtime for hours over 40, calculated on a regular rate that includes commissions.
Calculating Overtime When the Exemption Doesn't Apply
When a commissioned employee isn't exempt, commissions generally must be included in the regular rate:
- Add up all pay for the workweek: base wage or salary, commissions and other non-excluded pay.
- Divide by total hours worked to get the regular rate.
- Pay overtime for hours over 40. If straight-time pay already covers all hours, the extra owed is one-half the regular rate for each overtime hour.
| Step | Example |
|---|---|
| Hourly pay | 45 hours x $15 = $675 |
| Commissions earned for the week | $450 |
| Total straight-time pay | $1,125 |
| Regular rate | $1,125 / 45 = $25.00 |
| Overtime premium | 5 hours x $12.50 = $62.50 |
| Total pay | $1,187.50 |
When commissions are paid monthly or quarterly, they may need to be allocated back over the workweeks in which they were earned, and additional overtime paid for weeks with overtime. See the attendance bonus guide for how bonuses covering more than one week are allocated, and bonuses in employment compensation.
Draws Against Commission
Many commission plans include a "draw," an advance paid each pay period against future commissions. A draw can help employees earn steady pay in slow periods. For non-exempt employees, make sure total pay for each workweek meets minimum wage and overtime requirements, and that any recovery of unearned draws doesn't cut into wages that are required to be paid. State laws on draws and deductions vary, so get legal advice before setting one up.
Outside Sales Employees Are Different
Salespeople who mainly work away from your business, such as outside sales reps, may be covered by different federal rules. That's different from the 7(i) retail and service exemption, which applies to employees working at a retail or service establishment. If your salespeople spend most of their time away from your business making sales, have an attorney review which rules apply.
Records to Keep
- Hours worked each day and each workweek, for all commissioned employees.
- Base pay, commissions and other pay for each workweek.
- The representative period used for the more-than-half test, and the calculation.
- The weekly regular rate calculation, to show the 1.5 times minimum wage test was met.
- Your written commission plan.
Tracking hours is essential. You can't show the regular rate test was met, or calculate overtime correctly, without accurate hours. See how to track employee hours.
Common Commission Overtime Mistakes
- Assuming commissioned employees never get overtime.
- Applying 7(i) to a business that isn't a retail or service establishment.
- Ignoring slow weeks when the regular rate test fails.
- Not tracking hours for commissioned staff.
- Leaving commissions out of the regular rate for non-exempt employees.
- No documented representative period.
- Ignoring state law.
- Unclear draw and chargeback rules.
Commission Overtime Checklist
| Step | Done? |
|---|---|
| Confirm whether the business is a retail or service establishment | |
| Track hours for all commissioned employees | |
| Check the regular rate test every workweek with overtime | |
| Document the representative period and commission share | |
| Include commissions in the regular rate when not exempt | |
| Allocate monthly or quarterly commissions when needed | |
| Check state law | |
| Write a clear commission plan |
A Month in Detail: Checking the Tests
A car dealership pays a salesperson $300 a week plus commissions. Here's a four-week month:
| Week | Hours | Base | Commissions | Total | Regular rate | Above $10.875? |
|---|---|---|---|---|---|---|
| 1 | 44 | $300 | $800 | $1,100 | $25.00 | Yes |
| 2 | 48 | $300 | $1,200 | $1,500 | $31.25 | Yes |
| 3 | 46 | $300 | $150 | $450 | $9.78 | No |
| 4 | 42 | $300 | $650 | $950 | $22.62 | Yes |
| Month | 180 | $1,200 | $2,800 | $4,000 |
Over the month, commissions are $2,800 of $4,000, or 70% of pay, so the more-than-half test is met for a one-month representative period. But in week 3, the regular rate is $9.78, which isn't more than one and one-half times the federal minimum wage. Under the regulations, there's no exemption for that workweek, so the salesperson is owed overtime for the 6 hours over 40: 6 x ($9.78 x 0.5) = $29.34.
This is why tracking hours matters even for employees you expect to be exempt. Slow weeks can quietly create overtime obligations.
Writing a Clear Commission Plan
A written commission plan prevents disputes and makes overtime calculations easier. Include:
- Who is covered by the plan.
- How commissions are earned, such as on sale, delivery or payment.
- Commission rates and any tiers.
- When commissions are paid.
- How returns, cancellations and chargebacks are handled.
- Any draw and how it's reconciled.
- How hours are tracked and overtime is handled.
- What happens to earned commissions when employment ends, following state law.
Have employees sign that they've received the plan, and review it with an attorney, since state laws on commission agreements and final pay vary.
Questions Business Owners Often Ask
"If my salesperson is exempt under 7(i), do I still need to track hours?" Yes. You need hours to show the regular rate test is met each week with overtime.
"Can the exemption apply some weeks and not others?" Yes. The regular rate test is applied workweek by workweek.
"Do commissions count toward the regular rate for non-exempt employees?" Generally yes, which means they increase overtime pay.
When to Get Legal Advice
The 7(i) exemption has detailed rules, and a mistake can mean owing back overtime to several employees. Talk to an employment attorney before relying on it if:
- You're not sure your business is a retail or service establishment.
- Your salespeople have weeks with low commissions and long hours.
- You pay draws, chargebacks or complex tiered commissions.
- You have employees in states with their own overtime rules.
- Your salespeople spend much of their time away from your business.
In the meantime, track every hour and calculate the regular rate each week. If you're ever unsure, paying overtime is the safer choice.
Explaining Commission Pay to Employees
Commission pay can feel confusing, especially when overtime changes from week to week. Give each salesperson a clear breakdown: hours worked, base pay, commissions earned, the regular rate and any overtime premium. When employees can see how their pay was calculated, they're more likely to trust it and to catch mistakes early. A short explanation during onboarding, plus a sample pay breakdown, goes a long way.
Review your commission plan and overtime approach once a year, or whenever you change rates, add draws or open new locations.
Training Managers on Commission Pay
Sales managers often approve schedules and set expectations for hours. Make sure they understand that commissioned employees may still be owed overtime, especially in slow weeks, and that every hour must be recorded. Managers should never ask salespeople to work off the clock or underreport hours to protect an exemption. Clear training protects both the employees and the business.
Pair the training with a simple weekly check: before payroll, review hours and pay for every commissioned employee who worked over 40 hours, so slow-week overtime never slips through.
Track Hours for Commissioned Employees With Updoot
Whether or not your salespeople are exempt, accurate hours are the foundation. Updoot's employee time clock records every punch to the minute, and the payroll report shows weekly hours and overtime hours for every employee, so you or your payroll provider can check the regular rate test and calculate overtime correctly. Sales tracking keeps commission data organized.
Sources
- eCFR: 29 CFR 779.412, Section 7(i) Exemption Requirements
- eCFR: 29 CFR 779.411, Retail or Service Establishment
- eCFR: 29 CFR 779.417, Representative Period
- eCFR: 29 CFR 779.419, Regular Rate Requirement
- U.S. DOL: Fact Sheet #23, Overtime Pay Requirements of the FLSA