Q: We have two currently salaried employees who make about $42,000 per year. However, with commissions, we estimate that they will make $48,000 or more per year. They can still be exempt, right? What happens if their commissions do not exceed the minimum of $47,476 as expected? We’ve double checked the duties test and they both qualify as executives. We’re just worried about the salary threshold.
A: Great questions! This is definitely something employers with commissioned employees will want to keep an eye on. You are correct that if these employees make over $48,000, they can remain exempt. Up to 10% of the minimum salary threshold – $4,747 – may come from non-discretionary bonuses, commissions, or other incentive pay. Your commissioned employees will therefore need to be paid a guaranteed base salary of $42,729.
These incentive payments must be made on at least a quarterly basis, and if the employee does not earn enough of the incentive pay to reach the exempt salary threshold (pro-rated for the quarter, month, or whatever period you’re using), the employer must pay the difference in order to keep the employee’s exemption intact. The DOL calls these “catch-up payments.”
Here’s how these catch-up payments work. Because the annual salary threshold will be $47,476 and incentive pay must be made on a quarterly basis, commissioned employees need to make at least 25% of that amount (or $11,869) in base pay plus commission each quarter. If they make less than that amount per quarter, you’ll need to make a catch-up payment to cover the difference.
This payment must be made within one pay period and must only count toward their income during the previous quarter. If you fail to make a sufficient catch-up payment, the employee will be entitled to overtime pay for any overtime hours worked during that quarter.
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