Spiff and span: How to ensure you’re legally compensating your techs

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HVACR employers have long used “spiffs” to incentivize employees at various levels, including techs, in their businesses to promote sales. “Spiff” stands for sales performance incentive fund formula—it’s a phrase that translates into a commission or a bonus for selling products or services. Techs promote sales by spotting problems with HVACR systems and recommending solutions, or by advising consumers, for example, that a system is due for replacement, or by letting consumers know that their HVACR provider also sells other products such as generators.  

So, where’s the legal rub? 

If an employee satisfies one of the several legal exemptions from overtime, then rarely are there regulatory issues surrounding payment of spiffs. (ACCA members can access materials online about the recent increase in the salary threshold for exempt employees as well as the sorts of duties which qualify for the overtime exemption.) There is also an exemption from overtime under federal law for so-called outside sales employees who are paid by commission. However, the exemption only applies to salespeople who truly work outside the employer’s facility (not in an office), whose primary duty is making sales, and if they perform a mixture of duties, over half their compensation must derive from commissions. Techs whose primary duties are installing and servicing systems but who may also earn spiffs will not likely qualify for the commissioned sales exemption.   

Because HVACR techs do not usually satisfy one of the exemptions from overtime, they should be paid at an hourly rate and receive overtime at the rate of time-and-a-half after 40 hours in a week. (The usual cautionary note: Some states have more generous overtime rules, for example, California.) Techs can also earn spiffs or commissions or bonuses based on their marketing efforts—so the question then becomes, how is overtime computed in weeks where the tech’s total hours exceed 40? 

 The basic answer is that the employer totals up all the hours worked and all the compensation earned in wages and spiffs in a one week period and divides the compensation number by the total hours worked in the week to arrive at what the Department of Labor calls the “regular rate.” Overtime compensation is then computed as one-half the regular rate multiplied by the number of hours exceeding 40 in the work week. Remember that overtime is computed on a weekly basis, not a pay period basis, even if the paycheck is actually provided on some basis other than weekly. 

But what if the spiff cannot be calculated until after the usual payday for a workweek in which marketing activity resulting in a spiff has occurred? According to Department of Labor regulations, an employer can disregard the commission insofar as calculating the regular rate and overtime (if overtime has been worked) until the spiff can be determined. The regulations go on to say that any additional overtime compensation due after the spiff has been factored in should be apportioned back over the week or weeks in which the spiff was earned. 

What happens if an employee leaves the company before a spiff has been paid? Does non-payment set up a claim for unpaid wages? It is risky to provide that the spiff will not be paid if the employee has left the company but the job or the sale has been consummated, since courts tend to look at what seems fair in wage disputes.  

A best practice is to have a written policy for payment of spiffs which clearly sets out expectations to avoid confusion and misunderstandings—and legal entanglements. A policy can establish, for example, that a spiff is not earned until a job or a sale has been completed, or until the customer has paid the company. Describing how overtime will be computed can be helpful as well. 

Read this article and more online in the September/October edition of ACCA Now Magazine.

Disclaimer: This response is intended for general informational purposes only. It should not be construed as legal advice or a legal opinion, nor is this column a substitute for formal legal assistance. For help with particular legal needs, members are invited to consult with ACCA’s LegalTools Counsel, Brooke Duncan III, or Adams & Reese LLP.

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Posted In: ACCA Now, Legal