State:
March 19, 2024
Traps Await the Unwary Under Arizona’s Minimum Wage Law

by Jill Chasson

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Arizona voters first approved a state minimum wage in 2006. That ballot proposition included a provision for annual adjustments based on the federal consumer price index (CPI). In 2016, voters approved another ballot proposition that accelerated the rate of increase in the minimum wage for several years and maintained the indexed adjustment scheme for future increases.

Minimum Wage Law has Broad Coverage

Almost all employers and employees in Arizona are covered by the state’s minimum wage law. The only exceptions are for persons employed by a parent or sibling, casual babysitters, state and federal government employees, tipped employees (who may be paid $3 less than the minimum per hour), and businesses with less than $500,000 in gross annual revenue that are exempted from federal minimum wage law.

What employers sometimes fail to appreciate about this broad coverage is that, unlike many other state minimum wage laws, Arizona’s law applies to employees who are exempt from the minimum wage and/or overtime provisions of the federal Fair Labor Standards Act (FLSA).

Exempt Employees with Low Salaries

Compliance with Arizona’s minimum wage law has historically not been problematic for salaried, exempt executive, professional, and administrative employees who are paid at least the FLSA minimum salary—currently $684 per week ($35,568 annually).

As the state minimum wage increases, however, you’ll need to be mindful of the hours worked by those who are paid at or near the FLSA minimum salary to ensure continued compliance with Arizona law. For example, someone who is paid an annualized salary of $36,000 can work no more than 48 hours per week and still earn at least the Arizona minimum of $14.35/hour.

As you may be aware, the U.S. Department of Labor (DOL) has proposed raising the minimum salary for exempt employees to $55,068 annually. If this new salary threshold is ultimately enacted and upheld, it will mitigate the risk that hardworking exempt employees might earn less than Arizona’s minimum wage.

Commissioned Outside Sales Employees

Another compensation scheme that can give employers trouble is paying outside salespeople solely or primarily on a commission basis. This is permissible under the FLSA, which exempts outside salespeople from being paid a fixed regular salary. Thus, under federal law, an outside salesperson can legally go weeks or more without receiving a paycheck, such as when commissions are calculated monthly or quarterly.

That type of compensation scheme isn’t permissible under Arizona’s minimum wage law, which requires that all employees receive at least minimum wage for all hours worked in each workweek.

This means that if an outside salesperson doesn’t earn any commissions in a given week, the commissions earned are less than what the outside salesperson would earn if paid the minimum wage for hours worked in that week, or commissions are undetermined at the end of a workweek because calculations are performed less often than weekly, the salesperson must be paid at least the minimum wage for the hours worked in that workweek.

Because of the uncertainties associated with variable commission earnings and delayed calculations, a recommended strategy for Arizona-based salespersons is to pay a base weekly salary or fee that complies with the minimum wage law but functions as a draw against commission earnings. Under this approach, once commissions are calculated (and assuming they exceed the minimum wage), the base compensation can be deducted from the commission total.

For example, assume an outside salesperson is paid a base salary of $800 per week and works 50 hours per week. This yields an hourly rate of $16, well above the current minimum wage. Commissions for the four-week period from January 1 to January 28, 2024, are calculated by February 15, and the salesperson’s gross commissions total $10,000. The $3,200 in base compensation already paid to the salesperson can be deducted from the $10,000 in commission earnings for a net commission payment of $6,800.

Conclusion

As of January 1, 2024, the minimum wage in Arizona stands at $14.35 per hour—nearly double the federal minimum. Employers in northern Arizona should take note that the minimum wage in the city of Flagstaff is even higher than the state minimum—$17.40 per hour as of January 1, 2024. As 2024 gets underway, Arizona businesses (and other employers with Arizona-based employees) should review the compensation arrangements of exempt salaried and outside sales employees and make sure they’re being paid in accordance with Arizona’s minimum wage law.

Jill Chasson is a partner at Coppersmith Brockelman PLC in Phoenix, Arizona. Jill focuses on federal and state laws that govern the workplace and works with businesses of all sizes to develop workplace policies and resolve difficult personnel issues. When disputes arise, she represents employers before administrative agencies, in arbitration proceedings, and in state and federal court. You can reach her at 602-381-5481 or jchasson@cblawyers.com.

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