Dear Retail Clients and Friends,

A recent decision from the Massachusetts Supreme Judicial Court may require retail employers to reevaluate their pay practices for nonexempt employees who earn commissions. This edition of Morgan Lewis Retail Did You Know? discusses Sullivan v. Sleepy’s LLC,[1] where the court held that employers may not retroactively allocate commissions or draws for salespeople as overtime or premium pay. Instead, commission-based employees have a right to separate and additional payments for every hour worked over 40 hours in a week, on Sundays, or on designated holidays.

Background

In Massachusetts, all employers must generally pay nonexempt employees at least 1.5 times their regular hourly rate for hours worked beyond 40 in a week.[2] Retail employers must also comply with the Massachusetts Blue Laws,[3] which require that they pay employees a multiple of their regular hourly rate for all time worked on Sundays and designated holidays.[4]

Historically, many Massachusetts employers took the position that they had complied with the law so long as the amount of commissions or draws paid to 100% commissioned employees met or exceeded the amount of wages and overtime otherwise due for a given workweek. Massachusetts Department of Labor Standards opinion letters issued in 2003 and 2009, although somewhat ambiguous, tended to bolster this view. Until the decision in Sleepy’s, it was unsettled whether and how employers needed to account for overtime and premium pay for commissioned salespeople.

The Sleepy’s Decision

In Sleepy’s, a statewide class action, the plaintiffs contended that Massachusetts law prohibited employers from using commission/draw payments to satisfy overtime and other premium pay obligations. The defendants disagreed, arguing that they had met their obligations by paying commissions/draws that always equaled or exceeded the minimum wage for the first 40 hours of an employee’s workweek, plus all premium pay owed for overtime and Sunday hours.

The Massachusetts Supreme Judicial Court—considering certified questions of first impression from the District of Massachusetts—ruled that employers cannot retroactively designate commission or draw payments as overtime or other premium compensation. Instead, employers must compensate 100% commission-based, nonexempt employees with separate payments of at least: (1) 1.5 times the minimum wage for all overtime hours and all hours worked on certain designated holidays; and (2) a multiple of the minimum wage (currently 1.4 times the minimum wage) for all hours worked on Sundays and other designated holidays.

Practical Implications

In the wake of Sleepy’s, plaintiffs’ attorneys have filed waves of class actions against retail employers in Massachusetts. Retailers that compensate employees on a 100% commission basis are most affected by the Sleepy’s decision and should immediately review their pay practices for compliance, if they have not already.

Retailers that pay their salespeople partly by commission should also reexamine their overtime, Sunday, and holiday pay policies and practices, as these policies were likely established before Sleepy’s clarified Massachusetts law and before the legislature decided to phase out Sunday and certain holiday pay for retail workers.

Moreover, all employers should review their Massachusetts pay practices because the interaction between state law and the federal Fair Labor Standards Act can lead to unintended liability in numerous areas, such as incorrect regular rate calculations and incorrect crediting of Sunday premium pay against overtime.

How We Can Help

We can assist our clients with understanding the Sleepy’s decision and its impact on their Massachusetts pay policies. We can also help defend against threatened or actual claims arising from the Sleepy’s decision.