Commissioned employees are paid based on how much revenue they produce for their employer. The commission consists of money that the employee gets paid after they perform a certain task or service for their employer.
Commissions are determined based on a contract or policy created by the employer. Commissions are usually paid out monthly or quarterly. This schedule allows the employer to confirm that the employee has earned the commission and gives the employer enough time to pay out the commission.
Employers who decide to pay employees based on commission should keep legal compliance with minimum wage laws top of mind. These laws are the most likely for employers paying employees on commission to violate.
No, an employer cannot only pay an employee solely on commission because it could violate legal minimum wage requirements. There are state and federal minimum wage laws that require employers to pay employees a specific hourly rate.
The current federal minimum wage rate (as of 2023) is $7.25 per hour. Many states have higher minimum wage rates for employees working in those states. The physical location where an employee works will determine what state minimum wage law applies.
So, if an employee is remotely working from Virginia, then Virginia’s minimum wage rate of $12.00 per hour would apply. (This is the current minimum wage as of January 2023).
Employers can check state minimum wage rates on the U.S. Department of Labor website.
Whenever commission makes up a portion of the employee’s compensation, the employer will want to make sure that it is paying the employee enough to comply with minimum wage laws and that there is a clear written commission plan dictating how the commissions get paid.
Federal law does not require a commission agreement for the employer-employee relationship, and neither does DC, Maryland, or Virginia state law. However, it is best practice to have a written commission agreement or commission plan for your company.
A written compensation agreement will allow everyone to be on the same page about how commissions will be paid, avoid confusion, and allow you to administer the commission plan in a straightforward and easy way.
If there are multiple employees in your company that are receiving commissions, then the commission’s structure can be placed in a commission plan and also in commission agreements for each employee.
If there is just one employee who is receiving commissions, you could consider placing the commission details in the employee’s offer letter, or a commission agreement, instead of a commissions plan. Either way, if the company chooses to memorialize the details of paying commissions to its employees, these details should be in writing.
A commission plan or agreement should include:
1) what an employee needs to do to earn a commission
2) how the commission is calculated
3) when the employee will be paid the commission
4) if there are circumstances under which the employee can be excluded from receiving the commission
In particular, whether an employee needs to be employed by the company to receive the commission comes up often in disputes between employees and the employer.
For example, what if an employee is fired from your company but they have performed all the requirements to receive their commission under the commission plan – should they get paid commission? In this instance, the company would need to pay out the commission even though the employee is terminated.
Many employees have contacted our firm after being fired and not being paid commissions, so this is a hotbed area for employment disputes.
The employer can make legally required deductions from an employee’s paycheck, such as wage garnishments and payroll taxes. Many employers want to deduct an employee’s paycheck for failure to return company property, but this can violate state wage law.
In Virginia, employers cannot unilaterally decide to dock an employee’s paycheck for their failure to return company property. However, if the employer has the employee’s simultaneous written authorization to make such a deduction, it is allowed.
The same rules apply for Maryland and DC employers, meaning that absent a written simultaneous agreement by the employee to make the deduction, employers cannot make deductions from employee paychecks for the value of unreturned property.
Yes, an employer can make changes to a commissions plan that applies to future unearned commissions, provided the employer gives notice to the affected employees.
If an employee has already earned commissions under an employer’s plan by fulfilling all of the steps necessary to earn the commission, the employer cannot make changes to the employee’s commissions before they are paid out. At that point, the commissions are considered earned wages, and the employee is entitled to payment for them.
Employers are not legally required to provide paid time off (PTO) to commissioned employees under federal law. However, certain state laws do require employers to provide paid time off to employees under certain circumstances.
For example, Washington, DC employment laws require employers to give time off to their employees under the Accrued Sick and Safe Leave Act for certain things like sick leave, caring for an ill family member or pertaining to situations involving domestic violence or sexual abuse.
Virginia state law does not require employers to provide PTO, with certain exceptions, such as home health care workers and certain state government employees.
Also, employers who have a PTO program for their employees will want to clearly state whether they pay accrued, unused PTO to employees upon termination. State laws differ on how accrued and unused PTO is handled.
In Virginia, an employer is not legally required to pay out accrued, unused PTO, unless they establish their own policy of paying it out.
However, in Washington DC, and Maryland, if an employer does not state in its employment policies whether it pays out accrued, unused PTO to employees upon termination, then the employer must pay out the unused PTO upon termination of employment.
Generally, DC and Maryland are more employee-friendly than Virginia, but Virginia’s employment laws have changed in recent years, given that the state has become less “red” (Republican) and more “blue” (Democratic).
Likely yes, depending on the type and length of the leave of absence and the terms of the employer’s commission plan. If an employee takes leave under the federal Family Medical Leave Act (FMLA) and has fulfilled all of their requirements to earn a commission before they go on FMLA leave, the employee will still be entitled to a commission.
For example, if an employee receives sales commissions for originating clients to the company and receives a portion of each invoice paid by the originated client, even if the employee goes on leave, the employee should still receive payment for their originations.
Because there are many different circumstances under which employees take leaves of absence, it is best to clearly define with the employee what types of compensation they can expect during the leave of absence,
Employers should make policies that are favorable to employees because wage laws and court decisions interpreting wage law violations make determinations in a favorable way toward the employee. By making fair and clear commissions plans and agreements that treat employees the same, employers can avoid the stress and expense of an FMLA or wage lawsuit.
Are you a business owner or executive in the DMV area (DC, Maryland, Virginia)?
Or maybe you just want to hear our Lipp Law updates (thanks for your support! 🙏)?
If so, you should check out Lipp Law's Employment Law Newsletter. Expect regular updates about employment law and the team here at Lipp Law, focused on serving you - the backbone of our DMV business community.
If you like to keep your business compliant with employment law changes, subscribe below!