How to Calculate Paid Time Off for Commission-Only Employees
Federal law does not require employers to provide paid time off (PTO) to commissioned employees. Therefore, unless state law says differently, it’s up to employers to establish their own vacation and PTO rules — including the rate of pay — for commission-only employees.
How to Determine Your Calculation Method
When calculating the vacation/PTO rate of pay for commission-only employees, employers normally use one of three methods.
1. Pay vacation/PTO hours at the federal or state minimum hourly wage. Always pay vacation/PTO hours according to whichever is higher.
2. Limit the total vacation/PTO payment to the employee’s usual draw amount. In this case, you’ll need to determine how much the employee usually receives as a draw against commission, and then ensure that the total vacation/PTO payment does not exceed that amount.
With a draw against commission, the employee gets a regular paycheck, which is based on his or her future commissions. So, if an employee takes one week of vacation and usually receives a draw of $600 per week, his or her vacation pay for that week would be $600.
But, because a draw is basically an advance that is deducted from commissions earned in the future, you’ll need to be upfront about whether the vacation/PTO pay is a draw or a loan or whether you simply are giving the employee an amount that equals his or her usual draw. If the vacation/PTO payment is a draw or a loan, then the vacation/PTO isn’t really paid because it derives from the employee’s earnings and will reduce his or her future commissions.
3. Calculate the employee’s total earnings for the previous quarter or other representative period. After calculating these earnings, divide by the number of weeks in the quarter or other representative period. Total wages should include all forms of payment, including any bonuses received along with commissions.
For example, John earned commissions in the second quarter (April, May and June) and requests one week of vacation in July. Add John’s total wages earned for April, May and June. Then, divide the sum by the total number of weeks in those three months to arrive at John’s weekly rate of pay for vacation/PTO.
As stated, you can, alternatively, use a representative period. Because federal law does not require paid leave, barring the presence of an applicable state law, you can pick whichever representative period you want. The smoothest approach is to use the previous month that is closest to the leave period. In John’s situation, you would use only the June wages to determine vacation/PTO pay.
Apply the Method Consistently
Employers who offer vacation/PTO to commission-only employees often go with the third option, because payment is based on the employee’s actual earnings.
No matter which method you choose, ensure that it’s applied consistently to all commission-only employees. In your vacation/PTO policy, clearly state how time off is handled for those on commission. Also, check to see whether your state has vacation/PTO requirements relating to commissioned workers.