When a state raises the minimum wage above the federal minimum wage, which 30 states have now done, some questions can be raised by the employee over whether the compensation received is proper in certain circumstances. For example, what if the employee is paid on a commission?  Does the commission received have to exceed the state minimum wage or the federal minimum wage?  Also, can an employer count tips as commissions for that calculation?

Generally, employers must ensure that commission-based employees receive at least the federal minimum wage for all hours worked in each pay period.  That is, the payments, free and clear of any kickbacks or deductions to the employer, must exceed $7.25 per hour.  So, if the employer takes part of the commission, only the net to the employee counts in calculating the minimum wage requirement.

The FLSA established the Wage and Hour Commission and that Commission periodically provides an opinion letter. It recently provided an opinion letter (FLSA 2026-4) on these commission and minimum wage issues. There was concern raised over whether commission-based earnings must use the state minimum wage or the federal minimum wage to meet the minimum pay standard set out in section 7(i)(1) of the Fair Labor Standards Act (FLSA). The opinion letter ruling stated:

1. Commission pay is only for a “retail or service establishment”. AND

2. The pay must meet the minimum Pay Standard “Section 7(i)(1) requires that the employee's “regular rate of pay” exceed one and one-half times “the minimum hourly rate applicable” to him or her under “section 206” of Title 29, that is, the federal minimum wage, which is currently $7.25 per hour. See 29 U.S.C. §§ 206(a)(1)(C) and 207(i)(1). Accordingly, the exemption currently requires that the employee's regular rate exceed $10.875 per hour ($7.25 × 1.5)—or, for practical purposes, that the employee's regular rate be at least $10.88 per hour—for any workweek in which the employer claims the exemption.

3. The Pay must be commissioned for a representative period (one month or more) and comprise more than 50% of the employee's compensation.

The conclusion was that after meeting the above matters, the minimum pay only required reference to the federal minimum wage.  State law can be higher than the floor of federal law, but only state law would provide the remedy for violations of state law.  But if state law is pursued, is it preempted by federal law as to the remedy?  No, it is not.  “The FLSA explicitly does not ‘excuse noncompliance with any Federal or State law or municipal ordinance establishing a minimum wage higher than the minimum wage established under' the Act … .” So, to answer the question on which minimum wage you rely on, the federal law only applies to the federal minimum wage.  State law is not applicable for that calculation. You can, however, rely on violations of state law even if federal law is not violated. State claim remedies for wage violations are not preempted.

What about tips?  Do they count in meeting the minimum wage requirements of federal law? Under some circumstances, tips are not counted as commissions under section 7(i)(2). The circumstances in which they are counted requires the employer to take a "tip credit”. The tip credit can only be taken when the employer in fact relies on the tips to meet its wage obligation to the employee, and the tips are more than half of an employee's compensation for the representative period. The representative period is the time frame elected by the employer such as quarterly.  So, if the employer has not taken the tip credit, then the tip is not a commission and does not count toward minimum wage.  

The tip credit currently can be up to $5.12 per hour to be used against the federal minimum wage.  That would be included in the commission calculation as compensation and to the above commission standards must be met in addition to the “tip” standards.

Minimum wage issues raise an interesting question for Alabama. If the state is to compete with 30 other states, and especially those states nearby, should it raise its minimum wage level? See the attached table.