In a blow to employers, the Massachusetts Supreme Judicial Court (SJC) recently clarified the overtime and Sunday premium pay rights of non-exempt inside sales employees paid solely by commissions or advances on commissions, called “draws.” In the case at issue, Sullivan v. Sleepy’s, LLC, the SJC held that employees who are paid on a 100 percent commission basis are entitled to separate and additional overtime pay for hours worked in excess of 40 per workweek, as well as Sunday premium pay. 

Sleepy’s practice was to pay its inside sales employees solely on a commission basis and to pay a draw on commissions. The draw was designed to equal or exceed the minimum wage, as well as overtime/Sunday premium amounts the employees would otherwise would have earned if they were paid an hourly rate.  

In other words, Sleepy’s advanced commissions to employees week to week to ensure that employees always received at least the equivalent of minimum wage plus any premium pay based upon the hours they worked.  

In utilizing this practice, Sleepy’s relied on two guidance letters issued by the Massachusetts Department of Labor Standards (MA DLS). In this guidance, the MA DLS implied that if the amount of commissions and draws paid to employees equaled or exceeded the amount they otherwise would be due in wages and overtime, then the employer was complying with applicable laws and regulations. 

The SJC in Sleepy’s, however, noted that although these letters might have been misleading to employers, the letters do not say whether commissions and draws could be allocated retroactively, or credited, to cover overtime pay. The SJC opined that the language and purposes of the MA overtime statute, regulatory guidance, and case law all counsel that employers cannot “credit payments made to fulfill one set of wage obligations against separate and independent obligations.” In other words, employers cannot use draws on commissions to cover statutorily mandated overtime and Sunday premium pay obligations.   

This, of course, begs the question of what the regular rate of pay is for purposes of calculating overtime and Sunday premiums for commissioned sales employees. Employees who are paid on a commission-only basis are not paid a regular hourly rate and their pay from week to week can vary dramatically, making any calculation of a “regular” rate near to, if not entirely, impossible. The SJC answered this question as well in holding that the “regular hourly rate” for 100 percent commission employees is the minimum wage. So, non-exempt inside sales personnel, even if paid on a 100 percent commission basis, must also receive $18 an hour for hours worked over 40 in a workweek or on a Sunday.

The Sleepy’s decision is likely to have sweeping impacts, given the popularity of commission-only pay systems for inside sales employees. Employers in Massachusetts with employees paid solely by commissions and draws should review their wage payment practices and consult with counsel to make sure that they are complying with the new requirements set forth in Sleepy’s. The implementation of new pay practices to achieve compliance may also require substantial adjustments to existing commission plans to compensate for the additional premium pay burdens placed on employers with the Sleepy’s decision. In the end, the lasting impact of this decision is more likely to be lower commission rates and/or higher quotas than a windfall to employees.

Finally, this decision serves as a reminder to employers of commissioned salespersons throughout the nation that in addition to federal wage and hour requirements, they must be aware of additional obligations imposed by state and local authority.