I got asked a great question the other day by a colleague that made me think a bit, so I thought, what a perfect topic for a blog. So, here’s the question that started it all: Can a Minnesota employer in the service industry pay an employee the greater of: (a) minimum wage for each hour worked; or (b) commissions earned for services rendered during an employee’s shift? Her questioning this practice stems from the thought that the employer is affirmatively stating that, for some hours, $0 is attributed to certain time at work. In this example, let’s use a small employer, a hair salon. The employee is scheduled to work from 8:00 a.m. to 5:00 p.m. and has 3 clients on the books (with 8 total slots for the day). The rest of the day, the employee relies on walk-ins to fill her schedule, does other tasks around the salon to keep busy, or just waits around waiting for someone to walk-in. Some days she may leave to run errands. The employee earns $15/hr. commissions for each hour-long appointment, but credits $0/hr. for time without an appointment.
How Can the Employee Be Paid?
Can the employer pay the employee minimum wage for 8 hours of work ($7.25 x 8 = $58)? Yes, but I know you know that. That’s the easy one. Can the employer just pay the employee for the 3 clients the employee serviced if the employee stayed all 8 hours? No – I know you know that too. As 3 x $15 = $45, the minimum wage requirements have not been met and the employer would have to pay the additional $13 ($58-$45) to get the employee up to minimum wage for all hours worked. A Minnesota employer must pay for all hours worked, including waiting time, on-call time, training time, and any other time the employee is restricted to the employer’s premises. Minn. Rules 5200.0120. If the employee is free to leave during nonscheduled time (but must be able to receive a call to come back for an appointment), the employee is no longer working and need not be paid – so long as there are no restrictions that the employee remain close to the premises.
Can the employer just pay the employee commissions earned for services rendered during the shift? Yes, so long as those commissions combined are at least minimum wage. In this case, the employee would have to have had 4 clients, as 4 x $15 = $60, making the average hourly wage rage $2 more than minimum wage requirements. Although the employee was “working” for 8 hours, the employee was still paid $7.50 per hour, which is $0.25 more per hour than the small employer minimum wage.
Why Is This Allowed?
The Fair Labor Standards Act (FLSA) and Minnesota FLSA (MnFLSA) provide that minimum wage is based on a workweek. A workweek is a fixed and regular recurring period of 168 hours (7, 24 hour days). An employee can be paid a salary, commissions, piece rate, hourly or other basis. Accordingly, when looking at minimum wage or overtime, we look at how much money the employee made that week divided by the number of hours worked. At no point should the employee’s regular rate go below minimum wage, and also overtime should be paid based on all hours worked during the workweek. This, for example, is how employers get into trouble banking overtime hours from one week to the next – something I wrote about in my previous Friday Fun Fact.
Also, keep in mind that this is for Minnesota only! For example, California has recently enacted a bill (AB 1513), that states that salon/spa services are actually “piece-rate” work and not “commissions” work. Accordingly, California spa employers can no longer average total dollars paid by hours worked to cover both productive and non-productive work, as I just discussed above. Why do we care about this in the Great White North? Well, with most things wage and hour, they start in California, but spread like wildfire to other states such as Minnesota. Similar to paid parental leave, which started in San Francisco, and is coming soon to Minneapolis (as paid sick and safe leave), I suspect this is yet another change that may be coming at some point as it gains traction.
What About Tips?
In Minnesota, employers may not take a “tip credit” of any sort which serves (directly or indirectly) to reduce the employee’s wage below minimum wage. Minn. Stat. 177.24. Similarly, an employee cannot be required to share his or her tips with others, or forced to put it into a pool or fund for the benefit of the employer or other employees. Employees may certainly do so voluntarily, so long as it is without coercion. However, if employees request it, and they have an agreement with other employees, an employer may collect the tips for whomever is in the agreement for safeguarding, and thereafter disburse the shared tips to the employees participating in the agreement. Thus, the employer cannot, in our example above, say, well the employee made $10 in tips, so add the $45 in commissions for the three appointments, and she has met minimum wage. No. Can. Do. Employers with multi-state operations – I understand this is not the case in all states; many do allow a tip credit – but Minnesota does not.
To recap, ensure that every payroll the employee can take their total pay, divide by the total hours worked, and end up with a per hour rate of more than the applicable minimum wage for your size of business. Also, don’t forget to make it clear with the employee (preferably in writing), how the employee will be paid – make it clear that the employee will, in all instances, be paid at least minimum wage for all hours worked. Consider putting a policy whereby if an employee has any concerns or questions regarding compensation, they are directed talk to HR immediately (so any confusion can be cleared up or errors promptly fixed). Set forth how it works, and be sure the employee understands. A confused employee is likely to suspect the employer is hiding something, or something is not on the up-and-up, when that is not the case.