From Lexology, Cullan E. Jones and Christopher M. Pardo discuss a recent decision by the Supreme Judicial Court that said employees who are paid by commission are entitled to overtime pay. Cullan and Christopher write:
Massachusetts’ highest court, The Supreme Judicial Court (“SJC”), recently issued its long awaited decision in Sullivan v. Sleepy’s LLC, SJC-12542, in which the SJC responded to certified questions of first impression from the United States District Court for the District of Massachusetts. The case is particularly important for businesses which pay employees through commissions or draws (i.e., advances on commissions), particularly in the retail context where the ruling departs considerably from federal law.
Concluding that inside sales employees paid on a 100% commission-only basis are, in fact, entitled to overtime and Sunday premium pay, the SJC first turned to the language of the applicable statute and regulations. Like under federal law, Massachusetts law requires employers to pay non-exempt employees who work more than 40 hours per week at a rate of at least 1.5 times the employee’s “regular rate,” while a related regulation defines regular rate as “the employee’s total weekly earnings by the total hours worked during the week.” The overtime statute further provides that retail employees who work on a Sunday or certain holidays are entitled to pay for all such hours at 1.5 times their regular rate.
However, under the Massachusetts statute and regulation, the regular rate explicitly excludes commissions, draws on commissions and Sunday premium pay. Based upon this language, Sleepy’s had concluded that commission-only employees were not entitled to overtime or premium pay compensation. Sleepy’s belief was encouraged by two opinion letters issued by the Massachusetts Department of Labor Standards, which stood for the premise that employers had no overtime pay obligations under Massachusetts law to commission-only salespersons, so long as such individuals received at least the state minimum wage and time and one-half minimum wage for all hours worked over forty.
The SJC acknowledged that the language in the opinion letters “may have misled the employers,” but nevertheless noted that state law clearly prohibits employers from “retroactively reallocat[ing] and credit[ing] payments made to fulfill one set of wage obligations against separate and independent obligations.” The Court further concluded “that the overtime statute requires separate and additional overtime compensation to be provided to a one hundred percent commission employee regardless of whether that employee receives a recoverable draw or commissions that equal or exceed one and one-half times the minimum wage for any hours worked beyond forty.”
In considering the premium rate that must be paid to these employees, the SJC held that, because the regular rate excludes commissions, draws and Sunday premium pay, the overtime and/or Sunday rate must be at least 1.5 times the Massachusetts’ minimum wage, which “for one hundred percent commission employees” means that “[t]he overtime rate is thus one and one-half times the minimum wage.”
Despite recognizing that employers may have relied on the Massachusetts Department of Labor Standards opinion letters in formulating their compensation policies, the Court did not address whether its decision would apply retroactively or only prospectively.
All employers who operate in Massachusetts who pay employees on commission should review their pay practices to make sure they are in compliance with these new requirements. Those who should pay particular attention are car dealerships and those apply the federal retail sales exemption to retail sales employees.