The John Adams Courthouse
Photo: The John Adams Courthouse in Boston, Mass.

Overtime ruling surprises Massachusetts retailers

A surprising court ruling in Massachusetts has forced some furniture retailers to change how they pay their sales staff.

The Commonwealth’s Supreme Judicial Court decision in Sullivan v. Sleepy’s reversed a long-held understanding about overtime pay for sales employees who are paid by commission. Advisory letters issued by the Massachusetts Department of Labor Standards in 2003 and 2009 led employers to believe they didn’t need to pay overtime for work on Sundays or for hours in excess of 40 in a week, as long as the amount paid in commissions and draws was greater than 1.5 times the state’s minimum wage.

“We recognize that the opinion letters are less than a model of clarity and may have misled the employers,” the court wrote. “We nonetheless agree with the employees that … separate and additional overtime is owed.”

Specifically, employees paid entirely by commissions and draws “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,” the court ruled.

Premium pay on Sundays, for now

The minimum wage in Massachusetts is $12 an hour. Massachusetts law requires premium pay for Sunday work, although that requirement is being phased out over a five-year period. The Sunday provision only applies to businesses that employ more than seven people, including the proprietor.

The decision, issued May 8, threw the retail community into turmoil. The Retailers Association of Massachusetts is still assessing the impact, according to Ryan Kearney, its general counsel. Of acute concern is whether the decision means employers owe back pay to salespeople who weren’t paid overtime in the past. The court did not answer that question, but Kearney advises care because state wage-and-hour laws allow claims to be brought within three years of an alleged violation – with plaintiffs eligible to receive up to treble damages and attorney’s fees. Already, several retailers in the state have been served with lawsuits, Kearney said.

“In an effort to determine your potential exposure to liability under this decision, RAM suggests that members conduct a self-audit of their payroll for the past three years,” the Retailers Association wrote in a legal alert. “Members should then consider providing separate and additional compensation to commission employees identified as having worked overtime, Sundays and required holidays during that time in an amount equal to 1.5 times the minimum wage for all such hours.”

Retailers advised to change pay practices

RAM added: “Members are also strongly urged to revisit and revise their current practices and make corresponding changes to their employee handbooks to ensure compliance going forward. Considerations should include implementation of a strict time-keeping policy, limiting commission employees to 40-hour work weeks and changing your compensation structure to layer commissions over a base wage equivalent to the minimum wage for hours 1-40 and 1.5 times the minimum wage for overtime and retail premium hours. The self-audit and policy changes should be undertaken in consultation with independent legal counsel.”

A representative of one Home Furnishings Association member in Massachusetts said his company has adjusted its compensation method to a wage plus commission model in response to the court ruling and believes total payroll costs won’t change significantly.

The cost of overtime pay will increase with annual minimum-wage hikes scheduled until it reaches $15 an hour on Jan. 1, 2023. The cost of premium pay for Sunday work is declining, however. It already has fallen to 1.4 times a worker’s regular wage. The multiplier will drop to 1.3, 1.2 and 1.1 in each of the next three years and will be eliminated the next year.

That was part of a bargain made last year by business groups and legislators. Under the agreement, the state’s sales tax rate would be reduced and Sunday premium pay would be phased out while the minimum wage would increase and a paid family and medical leave program would be launched.

What retail businesses didn’t bargain for was a court ruling that potentially will drive up labor costs and create liabilities for past practices. Gov. Charlie Baker and legislative leaders have made it clear they can’t determine whether the Sullivan v. Sleepy’s decision can be applied retroactively, Kearney said. Resolving that question will be up to the courts.

State legislature can help

The legislature can rewrite the state’s wage-and-hour laws to relieve employers of overtime obligations for commission sales staff. Business owners should contact their representatives to push for that action. But another concern is whether federal courts, or courts in other states, will adopt the same view as the Massachusetts Supreme Judicial Court.

The purposes of the overtime requirement, the Massachusetts court said, quoting its own ruling in a 2008 case, are “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.”

But those purposes run against current business realities when many retailers are struggling to hire enough workers and when a longer work week isn’t a burden placed on commissioned salespeople but an opportunity for them to earn more money.

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