Alert: Judicial Decision Reminds Employers of the Complexity of Calculating Overtime Pay

Massachusetts law,ⁱ like the federal Fair Labor Standards Act,ⁱⁱ requires that non-exempt or “overtime-eligible” employees be paid one and one-half times their regular rate of pay for every hour worked over 40 hours in a workweek. For example, if an employee’s regular rate is the Massachusetts minimum wage of $12 per hour, then that employee must be paid $18 per hour ($12 x 1.5) for each overtime hour worked.

That sounds simple enough, but, in reality, there are as many complications as there are different systems of pay in use by employers. A recent decision by the Supreme Judicial Court of Massachusettsⁱⁱⁱ addresses one of those complications—specifically, how to calculate the regular rate and overtime when employees are paid 100% on commissions.
Tip - Readers who don’t care for algebra or who don’t have employees in Massachusetts can skip to the practical tips at the end of this alert.

In the case considered by the court, the plaintiff employees worked as salespeople at retail stores operated by the defendant employers, and were paid on a 100% commission basis, meaning that they received no compensation other than commissions. Even when they worked overtime or on Sunday, the employers did not pay them additional compensation beyond the commissions. (Massachusetts law requires premium pay for some Sunday workers.) The amount of compensation the employees received, however, always equaled or exceeded the minimum wage times the number of hours worked up to forty hours, plus one and one-half times the number of hours they worked over forty hours or on Sunday. Using the hypothetical example above, the commissions always were equal to or greater than the sum of $12 for every hour worked up to 40 hours and $18 for every overtime hour worked.

The employers argued that, under the above facts, they were complying with the law by retroactively allocating commissions to wages and overtime pay. For example, imagine that an employee earned $1,000 of commissions for a workweek in which she worked 50 hours. That equates to an hourly rate of $18.18 per hour for 40 hours and an overtime rate of $27.27 per hour for 10 hours--significantly more than the law requires. Under Massachusetts law, a worker who works 50 hours must be paid only $660—i.e., 40 times $12 (the minimum wage for the first 40 hours), plus 10 (the number of overtime hours) times $18 (one and one-half times the minimum wage). Because this worker was paid much more than $660, the employers argued that she was adequately compensated.

Not so, said the highest court of Massachusetts. Rather, under Massachusetts law, the employees are due additional overtime compensation equal to the minimum wage ($12) times the overtime hours worked (10, in our example), for a total of $120 for the 50 hour workweek.

While that may sound harsh, the employer may actually be getting off easy. There are not sufficient facts in the court’s opinion to know for sure, but there are circumstances in which, under federal rather than Massachusetts law, the correct answer would be that the employer must pay an additional $300 for the workweek. That number represents the total pay for the week ($1,000) divided by the number of hours worked (50), times one and one-half time the number of overtime hours worked (10). Then again, it’s possible that the employees in question qualify for the “inside sales exemption” that is available under limited circumstances under the federal Fair Labor Standards Act, but which is not recognized in Massachusetts. ͥ ᵛ

There are a number of practical tips employers both inside and outside of Massachusetts should take away from this case.

• Don’t rely on common sense to calculate your employees’ pay. Instead, there is no substitute for knowing both the applicable federal law and the law of the state where your employees work.
• Federal and state law may differ. Generally, the employee is entitled to the benefit of whichever law is more favorable to the worker.
• Overtime pay is generally one and one-half times the “regular rate,” but it is not always obvious what the “regular rate” is. Commissions, bonuses, and certain other payments—even some fringe benefits—can change the regular rate retroactively. And, to complicate matters, the U.S. Department of Labor has issued proposed regulations which, if adopted, will change the “regular rate” calculation.
• Some employees may be exempt from overtime pay under federal law, state law, or both. Again, make sure you are complying with both sets of laws.
• Employers and employees are generally prohibited from entering into agreements that would result in employees getting less pay than the law requires. Likewise, employees cannot “volunteer” to work for less than the minimum wage or to work overtime without getting time-and-a-half. (The reason, according to the U.S. Supreme Court, is that employers and employees do not have equal bargaining power, so no agreement would truly be voluntary.)
• Lastly, performing a wage-hour compliance audit every few years can detect problems, reduce expensive lawsuits, and help keep your company legally and financially healthy.

Click to view the full alert.

ⁱ G. L. c. 151, § 1A.
ⁱⁱ 29 U.S.C. § 207.
ⁱⁱⁱ Sullivan v. Sleepy's LLC, No. SJC 12542, May 8, 2019, slip opinion available at https://www.mass.gov/files/documents/2019/05/08/12542.pdf.
ͥ ᵛ See Massachusetts Labor & Workforce Dept. Opinion Letter MW-2009-04-12.21.09 (December 21, 2009).