FLSA2006-24 — Cash shortage deductions from commission payments and section 13(a)(1)

U.S. Department of Labor
Employment Standards Administration
Wage and Hour Division
Washington, D.C. 20210

July 6, 2006 FLSA2006-24

Dear Name*,

This is in response to your request for an opinion concerning whether cash shortage deductions from
commission payments made to salaried exempt employees would affect their exempt status under
section 13(a)(1) of the Fair Labor Standards Act (FLSA). For the reasons explained below, we conclude
that cash shortage deductions from commission payments made to salaried exempt employees would
not affect such employees’ exempt status under section 13(a)(1) of the FLSA.

Section 13(a)(1) of the FLSA, 29 U.S.C. § 213(a)(1) (copy enclosed), provides a complete minimum
wage and overtime pay exemption for any employee employed in a bona fide executive, administrative,
or professional capacity, as those terms are defined in 29 C.F.R. Part 541. An employee may qualify for
exemption if all of the pertinent tests relating to duty, salary level, and salary basis are met. Please note
that revisions to 29 C.F.R. Part 541 were published as a final rule on April 23, 2004 (69 Fed. Reg.
22,122) and became effective on August 23, 2004 (copy enclosed). Our response is applicable under
the final rule.

For discussion purposes, we assume that the affected employees meet both the duty and the
guaranteed salary level tests required under the final rule. As stated under 29 C.F.R. § 541.600(a)
(copy enclosed), an employee will be considered to satisfy the salary level if the employee is paid on a
salary basis at a rate of not less than $455.00 per week. The salary basis test is met if the employee
regularly receives each pay period “a predetermined amount constituting all or part of the employee’s
compensation, which amount is not subject to reduction because of variations in the quality or quantity
of the work performed. Subject to the exceptions provided in [29 C.F.R. § 541.602(b) (copy enclosed)],
an exempt employee must receive the full salary for any week in which the employee performs any work
without regard to the number of days or hours worked.” 29 C.F.R. § 541.602(a) (copy enclosed).

As indicated in 29 C.F.R. § 541.604(a) (copy enclosed),

[a]n employer may provide an exempt employee with additional compensation without
losing the exemption or violating the salary basis requirement, if the employment
arrangement also includes a guarantee of at least the minimum

weekly-required amount paid on a salary basis. Thus, for example, an exempt
employee guaranteed at least $455 each week paid on a salary basis may also receive
additional compensation of a one percent commission on sales. An exempt employee
also may receive a percentage of the sales or profits of the employer if the employment
arrangement also includes a guarantee of at least $455 each week paid on a salary
basis. Similarly, the exemption is not lost if an exempt employee who is guaranteed at
least $455 each week paid on a salary basis also receives additional compensation
based on hours worked for work beyond the normal workweek. Such additional
compensation may be paid on any basis (e.g., flat sum, bonus payment, straight-time
hourly amount, time and one-half or any other basis), and may include paid time off.

In other words, additional compensation paid on any basis besides the guaranteed salary is not
inconsistent with the salary basis of payment. See Field Operations Handbook § 22b01 and Wage and
Hour Opinion Letter April 1, 1999 (copies enclosed).

The final rule at 29 C.F.R. § 541.600(a) requires only that exempt employees be paid a guaranteed
salary of at least $455 per week, and any additional compensation above this salary amount is generally
something that may be agreed upon between the employer and the employee. The prohibition against
improper deductions from the guaranteed salary under 29 C.F.R. § 541.602(b) does not extend to any
such additional compensation provided to exempt employees. Therefore, it is our opinion that cash

U.S. Department of Labor
Employment Standards Administration
Wage and Hour Division
Washington, D.C. 20210

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shortage deductions may be made from a salaried exempt employee’s commission payments without
affecting the employee’s exempt status under section 13(a)(1) of the FLSA so long as the commission
payments are bona fide and are not paid to facilitate otherwise prohibited deductions from the
guaranteed salary.

This opinion is based exclusively on the facts and circumstances described in your request and is given
based on your representation, express or implied, that you have provided a full and fair description of all
the facts and circumstances that would be pertinent to our consideration of the question presented.
Existence of any other factual or historical background not contained in your letter might require a
conclusion different from the one expressed herein. You have represented that this opinion is not
sought by a party to pending private litigation concerning the issues addressed herein. You have also
represented that this opinion is not sought in connection with an investigation or litigation between a
client or firm and the Wage and Hour Division or the Department of Labor.

We trust that this letter is responsive to your inquiry.

Sincerely,

Alfred B. Robinson, Jr.
Acting Administrator

Enclosures:

FLSA section 13(a)(1)
29 C.F.R. Part 541
Field Operations Handbook § 22b01
Wage and Hour Opinion Letter April 1, 1999

* Note: The actual name(s) was removed to preserve privacy in accordance with 5 U.S.C. § 552(b)(7).