There is significant confusion among Arizona employers regarding the effect of minimum wage laws on the earnings of commission-based employees. Currently, Arizona law requires that employers pay commission-based employees the statutory minimum wage, which recently increased to $7.65 per hour (under a 2006 voter-approved initiative, Arizona's minimum wage is adjusted annually in order to account for inflation). See Ariz. Admin. Code R20-5-1206 (“ … no less than the minimum wage shall be paid for all hours worked … regardless of whether the wage is paid on an hourly, salaried, commissioned, piece rate, or any other basis.”). Arizona's minimum wage requirement applies even to those commission-based employees, such as outside sales employees, who are otherwise exempt from minimum wage and overtime pay requirements under the Fair Labor Standards Act (“FLSA”).
In Arizona, commission-based employees are treated similarly to tip-based employees. Among other things, state law requires that employers track and record the hours worked each week by commission-based employees. Once an employee's commission earnings are determined, the employer must then make sure that those earnings result in gross payment to the employee of at least $7.65 per regular hour worked. Employers that do not comply with these minimum wage requirements are subject to wage claims by commission-based employees, investigations by the Arizona Industrial Commission, and may also be liable for treble damages (three times the wages owed), among other things.
The following is an example of how an employer can comply with the FLSA, and still run afoul of Arizona's minimum wage law in the commission-based employee context:
Sally is an outside sales, commission-based exempt employee for XYZ Co., a business that manufactures and sells widgets in Phoenix, Arizona. During the first week of June 2012, which happened to be a particularly slow sales week at XYZ, Sally worked 65 hours and earned $475 in commissions based on her sales. XYZ therefore paid Sally $475 in gross wages for that week of work.
XYZ failed to comply with Arizona's minimum wage laws and is subject to penalties, investigation, and, potentially, treble damages. Under Arizona's minimum wage law, XYZ should not have paid Sally any less than $497.25 ($7.65 x 65) for the 65 hours she worked. Thus, after taking into account the $475 earned in commissions, XYZ still had to pay Sally an additional $22.25 in order to comply with Arizona's minimum wage requirements.
This example illustrates the importance of keeping track of employee hours worked, even if that employee is otherwise exempt from minimum and overtime pay requirements under the FLSA. Farhang & Medcoff is a full-service law firm that focuses on providing exceptional legal counsel to its clients. Our labor and employment attorneys are uniquely qualified to assist you and your business in achieving full compliance with Arizona labor laws. Please feel free to contact us if there are any issues with which we can help.
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