Commission Employees: Definitions, Regulations and Examples
Updated July 21, 2022
As a sales professional, you might receive an offer for a job with a commission-only pay structure. It's important to understand how this particular pay structure impacts your ability to earn income to determine if it is suited to you. In this article, we provide you a definition of what it means to be a commission-only employee, rules and regulations your employer must follow when opting to pay you as a commission-only employee and examples of types of jobs that might use this particular pay structure.
What are commission-only employees?
Commission-only employees receive pay based on the revenue they take in for the business. A commission is a sum of money that is payable to an employee after they complete a service or a task for a business. This is typically an agreed-upon percentage or flat fee from the money brought into the company.
When you're paid straight commission, that is the only pay you receive, meaning you do not have a base salary or hourly wages included in your pay. Commissions are usually used in sales positions as incentives to increase worker productivity or generate more sales, which can sometimes result in a higher income than a base salary depending on a person's motivation and ability.
What are some factors to consider when deciding on a commission-only pay structure?
When deciding if you want to work on a commission-only structure, you might want to consider the following factors:
Degree of influence you have over customer buying decisions
Mix of new business and account development
Business sales cycle
Type of commission formula (i.e. whether the rate is a fixed percentage or fluctuates depending on performance or the amount of the sale)
What are the benefits of a commission-only pay structure?
There are many benefits to a commission-only pay structure for employees, including:
Money: Workers paid 100% commission can often make more money than their peers making a salary to do the same jobs.
Independence: If you thrive without a lot of management and oversight, commission-only positions often allow you the freedom to work independently and adjust your hours to work longer or shorter schedules as needed and desired because your time spent in an office is not as important as your results.
Motivation: Your pay is directly impacted by your efforts and achievements, so you might be more motivated to keep performing at higher levels since you can see the continual payoff.
Flexibility: Some commission-only jobs offer freelance or work-from-home options giving you even more flexibility to work the schedule that fits your lifestyle and eliminating commute times and expenses related to driving to-and-from work.
Are commission-only employees non-employees?
Commission-only employees are typically independent contractors, meaning they provide work for a company as a non-employee. Independent contractors have to take care of their own taxes using a 1099 tax form provided by the employer and can acquire their own benefits such as health, dental or life insurance.
What is the regular rate for a commission-only employee?
The regular rate includes commissions, even when they are the sole source of income for an employee, as payments for hours worked. You can divide commissions paid weekly by the total number of hours worked during the workweek to calculate the regular hourly rate for that time period. This amount should be equal to or greater than current minimum wage standards unless the employee qualifies for an exemption under the Fair Labor Standards Act (FLSA).
Related: How To Calculate Commission
How is overtime calculated for commission-only employees?
Certain regulations require employers to pay commission-only employees for overtime, or hours worked over 40 hours per week unless they qualify for an exemption. To determine the amount of payable overtime, calculate one and a half times the regular rate and pay that amount for each hour worked over 40 hours in a weekly period.
What are the exemptions for overtime pay?
Per the Department of Labor, the following three conditions can qualify you for an exemption to the overtime requirements:
The employee works in a retail or service establishment.
The employee's regular rate of pay is more than one and a half times the minimum wage for each hour worked in a weekly period where the employees work overtime.
More than half of the employee's total regular earnings in a representative period not to exceed one year come from commissions.
Do commission-only employees get paid time off (PTO)?
It's not a requirement, but sometimes employers might decide to provide commission-only employees with paid time off or PTO. There are three methods generally used to determine the rate of PTO compensation for solely commission employees:
Setting PTO payments by federal or state minimum hourly wages
Limiting PTO payments by the employee's usual draw amount or future commission earnings
Calculating PTO payments based on the employee's total earnings from the previous quarter or other representative period
Related: What Is a Realtor's Commission?
What are some common commission-only jobs?
Here's a list of some common commission-only jobs with salary expectations and descriptions of primary job duties for each one:
National average salary: $36,250 per year
Primary duties: Retail sales associates are responsible for all sales activities related to a retail establishment including greeting and directing customers, answering questions, offering assistance, suggesting and selecting items, providing product knowledge and information, completing payment transactions, obtaining customer information, assisting with inventory and stocking merchandise and keeping customers informed of current or upcoming promotions.
Read more: What Is Retail Sales?
National average salary: $59,657 per year
Primary duties: Insurance agents identify leads and sales opportunities for insurance plans for clients. They might also oversee new and existing client portfolios, identify risk management strategies, explain the benefits of different insurance policies and answer questions, track claims and take care of policy renewals.
National average salary: $81,017 per year
Primary duties: Real estate agents help clients purchase, rent and sell properties. They might also advise clients of market conditions, suggest properties to meet buyers' needs and budgets, take clients on viewings, conduct walkthroughs, make offers and negotiate purchase terms and assist throughout the buying, selling or renting process and transactions.
National average salary: $86,212 per year
Primary duties: Direct sales representatives create customer awareness of certain products and services and meet customer needs by presenting those products and services to prospects and closing sales. Other duties include servicing new and existing accounts, obtaining orders, conducting research to find new leads and planning sales presentations and contact with prospects to provide product information and complete transactions.
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