When commission & overtime cause a payroll mess

By law employers are required to provide a description of all pay types and pay rates on their employee's check stub. Any reputable payroll company will have this covered. What has stumped some of them is the following scenario.

When calculating the regular rate of pay, CA Department of Industrial Relations says the following:

The "regular rate of pay" is the compensation an employee normally earns for the work they perform. The regular rate of pay includes a number of different kinds of remuneration, such as hourly earnings, salary, piecework earnings, and commissions. In no case may the regular rate of pay be less than the applicable minimum wage. http://www.dir.ca.gov/glossary.asp?letter=R

Both commissions and bonuses must be included in this calculation provided the bonus is nondiscretionary and it is based upon hours worked, production or proficiency. http://www.dir.ca.gov/dlse/faq_overtime.htm

Johnny, a hourly employee works as a sales person and earns commissions on sales. As a non-exempt employee Johnny earns over time when he works more than eight hours in a day or forty hours in a week.

Here is where the problems can start. Lets assume that Johnny worked 45 hours in the week, at $10.00 per hour, and earned commission of $400.00. His gross wage for the week would be 40 regular hours x $10.00, 5 over time hours at $15.00, plus the $400.00 for a total of $875.00.

On the surface my calculation above makes sense, but it is wrong. In 45 hours of work Johnny earned $875.00. The base rate used to calculate overtime is not $10.00 per hour ; it is actually $875.00/45 hours or $19.44 per hour. When calculating the overtime $19.44 x 1.5 x 5 hours is the proper way to calculate wages.

Here is the last hurdle to make this work and keep everything legal. Every week Johnny's total hours worked and commissions earnings will be different. The true rate used to calculate Johnny's overtime must shown on the pay stub so he can confirm accuracy. Your payroll system will need to be able to a) do the calculation each pay period and b) display that calculated rate on stub.


In the end you didn't start you business to be an expert in what makes a legal pay stub. So leave a comment or contact me direct and I can help you invest in the right tools that make you a better employer and keep your staff focused on delivering excellent experiences that keep your fans coming back.