Quick Answer: Commission is commission pay where hourly teams earn money for completing specific tasks, usually selling goods or services. Under the FLSA, commissioned team members must still receive minimum wage for all hours worked, and you must pay overtime unless they meet strict federal exemptions.
How Do Commission Rates Work and What Are The Legal Requirements?
Commission plans can get confusing fast, especially when you’re trying to motivate your team without breaking your budget. Here’s how the most common structures work, and what you need to know to stay compliant. They include:
- Straight percentage
- Tiered rates that increase with volume
- Base salary plus commission combinations
In retail, commission rates vary from 1-20% depending on product margins. Service businesses use substantially higher percentages: salon commission rates typically range from 40-60% based on experience level.
Tiered rates encourage better performance: 8% on first $5,000 monthly sales, 10% on $5,001-$10,000, and 12% above $10,000. Base salary plus commission works best when competing for talent or requiring significant product knowledge.
Federal law treats commissions as wages, creating specific obligations you must meet. If total weekly earnings divided by hours worked falls below $7.25 per hour, you must provide make-up pay. This calculation happens weekly and you cannot average compensation across pay periods.
The Section 7(i) exemption can eliminate overtime obligations, but only when you meet all three conditions: your business qualifies as retail or service, the team member earns more than 50% of their pay from commissions over a representative period, and their regular rate exceeds $10.88/hour during overtime weeks. Missing any requirement means you owe overtime pay for hours over 40.
How Do You Track and Manage Commission Payments Effectively?
Accurate commission management starts with reliable time and sales tracking, then flows through proper calculation and payment timing.
Accurate recordkeeping ensures compliance with commission calculation requirements. POS systems that automatically attribute sales to specific team members provide the foundation for accurate calculations. Combined with proper timesheets and time tracking, you can maintain the records needed for legal compliance and overtime calculation accuracy.
Payment timing varies by state: For example, California requires commission payments at least twice monthly, New York requires at least monthly payments, while Texas allows written agreements to determine the timing. Implement policies that meet the strictest state requirements in your locations.
Your commission payments must account for returns and chargebacks. According to the Department of Labor, you can calculate commissions on net revenue, implement a holding period, or use clawback provisions, but clawbacks require written agreements and cannot reduce any week's pay below minimum wage. You must maintain detailed records of hours worked, commission earnings, and total compensation for each team member for three years.
How Does Homebase Help with Commission Tracking and Payroll?
Managing commission compliance gets complicated when you're juggling sales data, hours worked, and wage calculations across multiple team members. Homebase combines accurate time tracking with organized payroll processes that address commission calculations, tax withholding, and compliance requirements.
Commission structures require precise recordkeeping and regular compliance verification, and tasks that become seamless when your systems work together.
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Sources and Methodology
At Homebase, we rely on up-to-date, authoritative sources to ensure every Question Center article provides accurate guidance for small business owners. We start with primary federal materials from the IRS and Department of Labor, verify details using official agency publications, and use reputable industry resources only to supplement—never replace—official law.
For this piece, we referenced DOL Fact Sheet #20 (Employees Paid Commissions By Retail Establishments) on commission-based pay and overtime exemptions, DOL Fact Sheet #21 (Recordkeeping Requirements under the FLSA) on recordkeeping requirements, and DOL Fact Sheet #23 (FLSA Overtime Pay) on overtime calculations. We also consulted California Department of Industrial Relations guidance on wage payment timing from their FAQ on paydays, and New York Department of Labor guidance on commission payments, including Form LS44 (Commission Salesperson Guidelines) and requirements under New York Labor Law § 191-c.