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Oct30

Reduction of Pay for Exempt Sales Employee

I own a small business in Florida with only one salesperson. When they were hired, the compensation was a base plus commission. However, she is not meeting the goals that have been set for her over the last 90 days. Is it legal for me to reduce their salary or eliminate it altogether and offer a commissions only compensation? Are there guidelines as to how much the salary can be reduced? This is an exempt employee working full time (40 hours per week). If a reduction is allowed, it is only for a specified amount of time?

The Fair Labor Standards Act (FLSA) provides exemption from minimum wage and overtime pay provisions to select employees including those employed in outside sales. Outside sales employees sell employer’s products or services away from the employer’s place of business. Inside sales employees, meaning those who work at the employer’s location, or employees whose sales are made primarily via phone, mail or internet generally don’t qualify for the exemption.

Three conditions must be met in order for a commissioned employee to be exempt under the FLSA: the employee must be employed by a retail or service establishment, the employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked, and more than half the employee’s total earnings in a representative period must consist of commissions. The employer must establish a representative period which can be as short as one month or up to one year. Unless all three conditions are satisfied, the exemption doesn’t apply.

Generally, an employee classified as exempt must receive his full predetermined salary for any week in which work is performed without regard to the quality or quantity of work. However, absent a contract stating otherwise, employers are able to change the compensation agreement for exempt sales employees as deemed appropriate. Compensation for a sales employee can be base salary plus commission or commission only and can change at the discretion of the employer.

Keep in mind that the change in commission structure must be made prospectively. Meaning, the employee must be notified of the change and the new policy implemented for a future date, not retroactively. Some states, like California, require such a notice to be provided in writing to the employee. Even if the employer is not legally required to put the compensation structure in writing, it’s best practice. Hope this answers all your questions!

This entry was posted on Thursday, October 30th, 2014 at 11:18 am and is filed under
Compensation, Human Resources Management.
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