Legally, employees classified as W-2 can receive compensation solely through commissions. This structure requires careful adherence to federal and state wage and hour laws, particularly concerning minimum wage requirements. For instance, a salesperson earning commissions might receive a draw against future commissions to ensure minimum wage compliance. This draw acts as an advance that is later reconciled against earned commissions.
Offering commission-based compensation to W-2 employees can incentivize performance and align employee goals with company objectives. Historically, this model has been prevalent in sales roles, fostering a results-oriented work environment. However, the legal landscape surrounding commission-only structures has evolved, emphasizing employer responsibility for ensuring fair labor standards are met. Properly implemented, this compensation model can benefit both the employer and the employee.