The federal Fair Labor Standards Act does not require overtime to be calculated in the way shown in our June 11 post.  The overtime amount the FLSA actually calls for is about 30% of the figure shown there.

The reason is that an employer need not divide the workweek-equivalent commissions by 40 and then multiply 1.5 times that rate times the overtime hours.  Instead, the workweek-equivalent commissions are divided by all of that workweek's hours, and the overtime premium pay is computed at one-half of the resulting regular hourly rate multiplied times the overtime hours.  Thus, the facts hypothesized in the June 11 illustration should produce this amount:

          ($2,307.69 ÷ 45 hrs.) = $51.28 Regular Rate

          ($51.28 × ½) = $25.64 Half-Time Premium Rate

          ($25.64 × 5 Overtime Hours) = $128.20 Overtime Premium Pay

U.S. Labor Department interpretations supporting this method are found in the Code of Federal Regulations at 29 C.F.R. §§ 778.119-778.120.

The rationale for the above calculation is this:  The Mortgage Loan Officer was paid the workweek-equivalent commissions as compensation for all of her hours worked in the overtime workweek (as is virtually always the case with commissioned employees), rather than only for the first 40 hours.  Those commissions therefore represent the "one" of "one and one-half" for those overtime hours, such that only the extra half-time overtime premium is due.  The half-time premium rate is based upon dividing the weekly-equivalent commissions by all of her hours worked in that workweek, and then dividing by two.

Erroneous information on this subject is making its way around the Internet, so beware.  Employers are of course free to pay more than the FLSA requires if they wish, but it is important to have a clear understanding first of what is and is not legally necessary.

The blogosphere is providing mixed signals about how to figure commission overtime under the federal Fair Labor Standards Act.  There is particular discussion on this point where Mortgage Loan Officers are concerned, now that the U.S. Labor Department opined in March that the "typical" one is non-exempt.  However, the FLSA overtime principles are the same for any commissioned employee who is subject to that law's overtime requirements.

To provide a framework to illustrate those principles, we ask that you reflect upon a hypothetical calculation and then give us your opinion.  We will provide the answer next week.

Assume that a non-exempt Mortgage Loan Officer who is paid solely on a commission basis (without any draws) earns $10,000 in commissions for deals closed during a calendar month.  In the four workweeks ending in that month, she worked 35.7, 45, 38.3 and 40 hours.

Her employer allocates the commissions on a weekly basis by multiplying the $10,000 times 12 and dividing by 52, for a weekly-equivalent amount of $2,307.69.  The Loan Officer is paid overtime wages for the 45-hour workweek, which her employer computes this way:

          ($2,307.69 ÷ 40 hrs.) = $57.69 Regular Rate

          ($57.69 × 1.5) = $86.54 Overtime Rate

          ($86.54 × 5 Overtime Hours) = $432.70 Overtime Pay

Is this the way the FLSA requires her overtime pay to be calculated?

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