The Extremely Narrow Overtime Exemption For Inside Salespersons

Inside sales positions are frequently misclassified as being exempt from overtime.  One reason inside sales positions are often incorrectly classified as exempt is that different criteria apply under federal and state law.  Indeed, inside sales is one of relatively few positions that large companies may have an easier time classifying a position as exempt under California law (Wage Order Nos. 4 and 7) than federal law (the Fair Labor Standards Act (“FLSA”)).  The chart below summarizes the basic differences between the FLSA and California law.

But one crucial point must be emphasized.  Even if all applicable tests are met, an inside salesperson is only exempt from being paid overtime in California.  An employer still must provide one (or sometimes two) half-hour meal breaks and two (or sometimes three) ten-minute rest periods every day (more details on those requirements here).  Failing to provide meal and rest periods makes the employer liable for two additional hours of pay to the employee plus significant penalties.  Given the applicable statutes of limitations, employees may recover tens of thousands of dollars just related to the employer’s failure to have a written, actively-enforced policy of providing meal and rest periods to the inside sales team.  Thus, even if an inside salesperson is exempt from overtime pay they may still have very valuable causes of action against an employer.

FLSA California
Source of Exemption 29 U.S.C. § 207(i) Section 3(D) of Wage Orders Nos. 4 and 7
Place of Work “Retail or Services Establishment” No particular place is required but industry must be covered by Wage Order No. 4 or 7
Commission Threshold 50% of total earnings during each “representative period” must be commissions 50% of total compensation during each “representative period” must be commissions
Weekly Earnings Threshold Total earnings in each workweek exceed 1.5 times minimum wage under federal law (i.e. $10.88 * all hours worked in that week)(Carry-forward of excess pay over the minimum wage from one pay period to the next can be used to satisfy threshold) Total earnings in every workweek exceed 1.5 times minimum wage under California law (i.e. $13.50 * all hours worked in that week)(Carry-forward of excess pay over the minimum wage from one pay period to the next cannot be used to satisfy threshold)
Remedies if foregoing criteria are not met and individual is misclassified as a being exempt from overtime – All weekly hours worked in excess of 40 paid at 1.5X regular rate of pay 

– Liquidated, double damages if employer’s failure to pay overtime is willful

 

– Attorneys’ fees and costs

 

-Two-year statute of limitations

(3 years if violation is “willful”)

 

– All hours worked between 8 and 10 per day paid at 1.5X regular rate of pay 

– All hours worked in excess of 10 per day paid at 2X regular rate of pay

– Waiting time penalties after employment ends that are the equivalent of 6 additional weeks of  pay

 

– Per-pay period penalties under various sections of Labor Code and Wage Orders

 

– Attorneys’ fees and costs

 

-3 year statute of limitations that is extended to four years for some claims

 

Alternative exemptions that may be applicable – Highly Compensated Employee(requires compensation in excess of $100,000/year among other criteria)

-Outside salesperson

(requires individual to customarily and regularly engage in sales outside office)

-Executive Exemption

(must “customarily and regularly manage two or more employees”)

-Outside salesperson(applies if 50% of time is spent outside office engaged in selling activities)-Executive Exemption

(must spend more than 50% of time managing two or more employees)

“Inside Sales” vs. “Outside Sales”

Under both federal and California law, the “inside” in inside sales refers to the location where an employee spends their working hours. Inside distinguishes those employees who work in an office (i.e. phone sales) from those who travel and sell products outside an office (i.e. in-person sales). Inside salespersons are those employees whose primary duty is to engage in “sales” (i.e. efforts to obtain orders from customers to buy any product or service) from an office or similar establishment.

Common job titles for inside salespersons include: Inside Sales Representative, Account Representative, Customer Account Representative, Business Development Executive (BDE), Sales Account Representative, Sales Executive, and Sales Advisor.

50% Commission Threshold During Each “Representative Period”

To be exempt from overtime under either California law or the FLSA, an inside salesperson must receive more than half of her compensation from commissions. If an inside salesperson’s salary makes up more than half of her on-target earnings (“OTE”) she is non-exempt from overtime. If an inside salesperson is given unreasonable quotas such that, realistically, commissions will rarely exceed salary, then she is non-exempt from overtime. If an inside salesperson receives a draw against commissions for a very long period of time such that the “commissions” are really just salary in another name, she is non-exempt from overtime.

Moreover, the requirement that commissions make up more than 50% of total compensation is not measured over the entire duration of one’s employment. Rather, both the FLSA and California law require that this be measured in “representative periods” that the employer must designate. A representative period cannot be longer than a year or shorter than a month and it should generally track the earning cycle for a salesperson. Quarterly periods are a common representative period and, accordingly, an inside salesperson who could be exempt from overtime during a good quarter and non-exempt in the following quarter, depending on variations in commissions earned.

Each Workweek, Total Earnings Must Exceed 1.5 Times Applicable Minimum Wage

An inside salesperson may be exempt from overtime in a given workweek if, and only if, their earnings in that week exceed the product of the number of hours worked in the week and one-and-a-half times the minimum wage ($9/hr in California, $7.25 under the FLSA).

Courts have held that the FLSA permits an employer to carry forward excess commissions earned by salesmen during one pay period and apply them to the minimum wage for the next period so long as the employee actually received the minimum wage for each hour worked within each separate pay period.   Olson v. Superior Pontiac-GMC, Inc., 765 F. 2d 1570, 1579 (11h Cir. 1985).

But the California Supreme Court recently held that an employer may not comply with the earnings threshold under California law by carrying forward payments in excess of the minimum wage. Rather, total compensation actually received during each workweek exceed the minimum wage.   See Peabody v. Time Warner Cable, Inc., No. S2044808 (July 14, 2014). Since commissions are generally paid on a monthly or quarterly basis and are almost never paid weekly, this provision effectively sets a floor on the salary an inside salesperson must be paid every week in California.

Assuming an employee works 50 hours in a week and receives no commissions, her total weekly salary must exceed $544 to be exempt under the FLSA and $675 to be exempt under California law. If it does not, then overtime is owed for that week even though total commissions exceed total earnings over the duration of the representative period.

Type Of Office

California law does not require an inside salesperson work in any particular location to qualify for its commission-based overtime exemption. The FLSA, however, requires that the individual work in a “retail or services establishment.” This term is not defined in the statute, but in a series of regulations the Department of Labor (DOL) has enumerated scores of locations that do not qualify as a retail or services establishment (29 CFR 779.317) and stated that “typically a retail or service establishment is one which sells goods or services to the general public” (29 CFR 779.318).

Some courts have given deference to these DOL regulations concluding, effectively, that an employee at a large company who is engaged in telephone sales cannot be exempt from overtime because he does not work in a retail or services establishment (Underwood v. NMC Mortgage Corp., 2009 WL 1269465 (D. Kan. May 6, 2009)) but are cases that come out the other way (Selz v. Investools, Inc., No. 2:09-CV-1042 TS, 2011 WL 285801 (D.Utah Jan. 27, 2011).

Alternative Exemptions For Salespeople

Commission-based salespersons may be exempt under a number of other exemptions but, in most cases, they will not be. For example, salespersons who spend most of their time managing a sales team may be exempt under the Executive Exemption. Salespersons who travel outside the office on a regular basis may be exempt under the outside sales exemption, which applies under California law if more than half of the employee’s working hours are away the employer’s place of business and applies under the FLSA if the employee is “customarily and regularly” engaged in sales outside the office (i.e. one or two days a week). Finally, some very highly compensated inside salespersons may be exempt under the FLSA, but not California law, if their compensation exceed $100,000/year and they engage in certain other managerial or administrative duties.

Conclusion

For the reasons discussed above, most inside sales positions at technology companies should not be classified as overtime exempt. First, few inside salespersons doing office-based sales for a technology company will be deemed to work in a “retail or service establishment” as required by the FLSA. Second, the compensation for most inside sales positions is not structured to satisfy both the weekly compensation component ($13.50/hour under California law and $10.88/hour under the FLSA) while simultaneously paying commissions in excess of salary during each “representative period.”  Third, few inside sales positions will meet another exemption under California law (though some will meet the “highly compensated employee” exemption under the FLSA).

If you have been misclassified as exempt from overtime, California law provides significant remedies. You may recover damages for up to four years of unpaid overtime, daily penalties for missed meal and rest periods, a post-termination penalty equal to six weeks’ pay, attorneys’ fees and other amounts on a “per-pay period” basis. Damages for these violations would exceed $150,000 for someone who made $60,000/year over a four year period, worked ten hours of overtime per week and was not provided meal or rest periods. The applicable statutes also mandate awards of attorneys’ fees.

Please contact Sebastian Miller Law if you believe you may have been misclassified as an exempt inside salesperson and/or if you have not been provided daily meal and rest breaks.

Disclaimer: All materials have been prepared for general information purposes only to permit you to learn more about Sebastian Miller Law, P.C, its services and experience. The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice.

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