How Do I Correctly Establish An Hourly Rate?

---

Question: How do I establish a base hourly rate for the purpose of computing overtime for an hourly employee who receives a commission on equipment sales that is actually paid to the employee only when the customer pays us?

Answer: To start with, it’s helpful to define when the employee earns the commission, and to bear in mind that commissions are considered payment for hours worked and must be included in the regular rate of pay.

We’ll assume the commission is earned only when the customer pays the company — in other words, the employee is not entitled to a commission until and unless the customer pays the company — so, the commission is earned in the week in which the company receives payment, as opposed to the week in which the sale was made.

That means that for the week in which the job was performed, overtime pay is simply a matter of multiplying the employee’s regular hourly rate times 40 hours and adding to that sum the number of hours over 40 times 1.5 of the regular hourly rate.

Then, in the week in which the employee is actually paid the commission, his regular hourly rate will need to be re-computed to encompass the commission. That’s done by dividing total remuneration for the week (including the commission) by the total number of hours worked (straight time and overtime) to derive a regular rate of pay for that week (i.e., a new straight-time rate for that week). Then, if there are more than 40 hours worked during the week in which the commission was paid, use this new straight-time rate to determine the time-and-a-half to be applied to those hours over 40.

DISCLAIMER
This response is intended for general informational purposes only and 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 Brooke Duncan III of Adams and Reese LLP. Mr. Duncan can be reached at 504-585-0220 or by email at brooke.duncan@arlaw.com.

---

Posted In: Legal