MA SJC Made 100% Commissioned Inside Sales Reps a Risky Bet
For many years, preeminent employment lawyers and business trade groups had advised businesses to ensure that the payments made to 100% Commissioned Inside Sales Representatives are at least equal to or greater than minimum wage for the first 40 hours worked each week plus one-and-a-half times the minimum wage for each hour worked over 40 hours per week.
The Massachusetts Supreme Judicial Court just dropped the hatchet on that advice in Sullivan v. Sleepy’s LLC, 482 Mass. 227, 121 N.E.3d 1210 (2019).
In so doing, literally overnight, the SJC made hundreds (maybe thousands) of Massachusetts businesses violators of the G. L. c. 149, § 148 (Massachusetts Wage Act), and overtime and Sunday pay statutes. Consider all the car dealerships, construction equipment sales, door-to-door sales companies, and virtually any other business that relies on 100% commissioned inside sales representatives who now risk a lawsuit (or even class-action suit) for triple damages plus attorney’s fees and costs.
This ruling does not just apply inside sales representatives – it applies to all employees paid in 100% commissions.
The real blow will be felt by small business owners who may not hear about this ruling or the change in the application of the law for years. Even those businesses who paid their employees the monetary equivalent of the correct amount due, or more (i.e., the employee’s regular rate for 40 hours plus 1.5 times the regular rate for each overtime hour) may be sued if that payment is ‘retroactively allocated.’
For too many small business owners, this reasoning is going to appear entirely foreign and illogical. In making this ruling, the SJC stated:
“We conclude that draws and commissions cannot be retroactively allocated as hourly and overtime wages and Sunday pay even if these draws and commissions equaled or exceeded the minimum wage for the employees’ first forty hours of work and one and one-half times the minimum wage for all hours worked over forty hours or on Sunday. Rather, the employees are entitled to separate and additional payments of one and one-half times the minimum wage for every hour the employees worked over forty hours or on Sunday.” (emphasis added).
You read that correctly. The employer’s violation and liability under the Massachusetts Wage Act exists even if the employer OVERPAID the monetary equivalent of minimum wage for the first 40 hours.
The pertinent and stipulated facts of this case included the fact that the employee sales representatives were (1) inside sales representatives – meaning an employee who makes
sales at the employer’s place of business (i.e., a shop or store), (2) were paid 100% commissions, or a commissions-draw/advance, (3) were paid for each day worked wages in the amount of a $125 “recoverable” draw or the actual amount of commissions earned more than $125 each day worked, (4) on at least one occasion, the employees worked more than 40 hours in a week. Also, they worked on at least one Sunday, and (5) when the sales representatives worked more than 40 hours a week or a Sunday, the employers did not pay the employees any additional compensation beyond the $125 recoverable daily draw or earned commissions above $125 per day.
The SJC specifically noted that the amount of compensation the employees received each week was always equal to or more than the minimum wage multiplied by the number of hours they worked up to 40 hours, plus 1.5 times the number of hours they worked over 40 hours or on Sunday. Additionally, the SJC acknowledged two previous opinion letters published by the Dept. of Labor concerning this issue:
(1) March 14, 2003 – which stated: an “inside sales employee who is paid on a [one hundred] percent commission basis” is “subject to the state
overtime law” and, relying on 455 Code Mass. Regs. § 2.01 (2003), “Massachusetts law requires that [a one hundred percent commission] employee be paid at least the equivalent of minimum wage for the first [forty] hours, and time and one-half minimum wage for all hours worked over [forty] in a given workweek.”
(2) December 21, 2009 – which stated that “inside salespersons are subject to the state overtime law” and must “be paid at least the equivalent of minimum wage . . . for the first [forty] hours, and time and one-half minimum wage . . . for all hours worked over [forty] in a given workweek.” For example, the DOL letter stated, “If an employee paid on a [one hundred] percent commissions basis, works [fifty] hours in a given workweek, the employee’s total compensation for that week must equal or exceed $450.00 ($320.00 [$8 x 40 hours] +$120.00 [$12 x 10 hours]) [sic].”
In rending its decision, the SJC asserted that neither opinion letter addressed whether a lump sum equaling or exceeding these amounts was sufficient. However, the SJC wrote, “We recognize that the opinion letters are less than a model of clarity and may have misled the employers.” To be sure, some of the state’s preeminent employment law lawyers were almost certainly scrubbing their blogs and guidance newsletters moments after this ruling was published – because they interpreted those letters and the law as permitting commissions and advance draws so long as the total was “at least the equivalent of minimum wage for the first [forty] hours, and time and one-half minimum wage for all hours worked over [forty] in a given workweek.”
The SJC sites three prior Massachusetts to support its conclusion that the Massachusetts overtime statute does not permit the retroactive allocation of compensation payments. First, the SJC states that employers cannot make payments to employees and then later ‘reallocate’ those payments made for one purpose to another purpose. In so far as that conclusion is accurate, what is interesting in this case is that it does not appear the employer engaged in any retroactive reallocation. The certified questions and stipulated facts suggest that this is not a case where the employer knowingly or ignorantly failed to ‘factor in’ overtime pay and just happened to have paid the employees greater than the amount they were due for regular and overtime pay. In fact, it seems that the employer intentionally allocated the daily rate of $125 OR the commissions earned more than $125 each day to the regular hours and overtime hours worked for the very purpose of complying with the Massachusetts overtime statute. In other words, it was not sheer ‘luck’ or happenstance that the amount paid to the employees was equal to or exceeded what was due under the law. Therefore, this employer’s conduct is contrary to the concern raised by the SJC: “[I]f employers could undertake such retroactive reallocation of payments, they would similarly lack an incentive to comply with the wage and overtime statutes in the first place.” In fact, it’s safe to say the employer engaged in this compensation structure to comply with the Wage Act and Overtime statute given the language of those statutes, the opinion letters, and years of employment lawyers’ guidance.
In this case, you had:
(a) an employer who intended to pay what was due per the law and relying on two government opinion letters (or legal advice that likely stemmed from those letters),
(b) an employer who implemented a compensation structure that ensured each employee was paid at least what was due, and
(c) an employee who received at least or more than the regular and overtime wages they were entitled to – but
(d) because the $125 draw OR commissions earned and paid in excess of $125 were not specifically and contemporaneously allocated to the actual regular rate hours and overtime rate hours worked each week — the SJC has determined the employer violated Massachusetts law.
Given that this compensation structure for 100% commissioned inside sales representatives is widely used in Massachusetts, many employers should wake up tomorrow wondering if / when a class action lawsuit will find its way to their door.
Where at least two government opinion letters had interpreted the Massachusetts overtime law as permitting what the employer did in this case, it would be equitable for this ruling to have only prospective applicability (and those two opinion letters should be immediately removed, revised, and reposted).
The decision focuses on its assertion that the commissions payments and advance draws were somehow a retroactive allocation, yet these payments are determined daily.
In Mullally v. Waste Mgt. of Mass., Inc., 452 Mass. 526, 531 (2008), the court ruled, “[this is] to reduce the number of hours of work, encourage the employment of more persons, and compensate employees for the burden of a long work week.”