The SJC, Massachusetts’ highest court, issued its long awaited decision in Sullivan v. Sleepy’s LLC, SJC-12542 on May 8, 2019. The case should be of concern to businesses which pay individuals fully or primarily by commission, especially in the retail context or in automobile sales where the ruling departs sharply from federal law.
It should have been clear long ago that inside sales persons outside of the consumer retail context were entitled to receive time and one half their regular rate of pay for each hour worked in excess of 40. That regular rate of pay clearly included their hourly wages or salary along with all other forms of remuneration to include commissions and non-discretionary bonuses. Under the Fair Labor Standards (“FLSA”) or federal law, there are exemptions creating alternative methods of calculating overtime pay for employees engaged in the sale of retail products and services and automobiles. The SJC has now made it clear that no such exemptions apply under Massachusetts state law.
The SJC was asked to consider two questions in the Sleepy’s case. The first:
If a 100% commission inside sales employee works more than forty hours in a given work week, is the employee entitled to any additional compensation specifically for overtime hours worked when the employee’s total compensation (through draws and commissions) for that workweek is equal to or greater than 1.5 the employee’s regular rate or at least 1.5 times the minimum wage for all hours worked over forty hours in a workweek. If additional compensation is due, what is the employee’s regular rate of pay for purposes of calculating overtime pay?
The second question was identical, but related to Sunday premium pay. The court answered both questions in the affirmative. The court was clear in stating that the employer was not permitted to “retroactively” apply commissions already earned in order to satisfy the obligation to pay overtime. Overtime pay and Sunday premium pay is owed above and beyond the total earnings in a prior week. In making its decision, the court looked at the legislative history and plain wording of the statute and similarly considered the public policy reasons behind overtime laws: discouraging employers from requiring employees to work long hours to relieve them from the burden of working long hours away from their families and incentivizing businesses to hire more workers.
Also important, was the SJC’s conclusions on what constitutes an employee’s regular rate of pay for overtime purposes. Although regular rate of pay is not defined in the overtime statute, the Department of Labor Standards has promulgated a regulation which defines the regular hourly rate of an individual not actually paid by the hour as the number which results when the employees total weekly earnings are divided by the number of hours he or she worked. This number must meet or exceed the minimum wage. The regular hourly rate must also include all remuneration paid to the employee including “sums paid as commissions, drawing accounts, bonuses, or other incentive pay based on sales or production…” The overtime rate then is 1.5 times the regular rate of pay, and according to the SJC, it must be paid in addition, to the wages received when an employee works more than 40 hours or on Sunday.
All employers who pay employees on commission should be reviewing their pay practice to make sure they are in compliance with these requirements. Those who should pay particular attention are car dealerships which have been following the guidance of the Massachusetts State Automobile Dealers Association, which is contrary to this decision, and those apply the federal retail sales exemption to retail sales employees. This is a complex area of the law with significant risk of error, and consultation with counsel is recommended.