Here it is — the grand finale of FLSA overtime exemptions, the dynamic duo, the outside sales representative and the commissioned retail employee! If you employ salespeople, have you made sure that they really are exempt from overtime pay? Which sales positions make the cut? Join The Emplawyerologist after the jump to find out more!
An employee meeting the criteria for either exemption will not be entitled to overtime for any hours worked in excess of 40 in any week. The outside sales employee is exemption has received more attention in the courts and the media, so let’s start with that one.
A position qualifies for the outside sales employee exemption when it meets both of the following requirements:
- The employee’s primary duty is either making sales or obtaining orders or contracts for services or for the use of facilities for which consideration will be paid by the client or customer; and
- The employee is customarily and regularly engaged away from the employer’s place or places of business (emphasis added).
Note that this exemption lacks a salary requirement. Why? It acknowledges the reality that most sales employees receive commissions. Outside sales do not include sales made by mail, telephone or the internet. In particular, telemarketers would not fall under this exemption.
What does it mean to “make sales” though? Is promoting a product or service without actually closing a sale enough? This had been a particularly contentious issue with respect to pharmaceutical sales representatives. The US Circuit Courts of Appeals had been split on that question, until June 2012, when the US Supreme Court ruled that such sales representatives working for SmithKline Beecham were exempt. In so ruling, the Court affirmed the Ninth Circuit’s ruling, and refused to defer to the US Department of Labor’s interpretation (deeming such employees non-exempt). This ruling also effectively overrules the Second Circuit ruling in In Re Novartis Wage & Hour Litigation 611 F.3d 141 (2010), which, relying on DOL interpretations of its own regulations found such employees to be non-exempt. What was really at issue in these cases? Under the DOL’s interpretation of the regulations, a person “who merely promotes a product that will be sold by another rather than transferring title does not ‘make the sale'”. The Second Circuit also noted the specific fact that the pharmaceutical sales industry forbids sales representatives from actually closing a sale with doctors and reasoned that a pharmaceutical sales representative therefore cannot be an exempt outside sales representative. The US Supreme Court’s ruling is interesting in its refusal to grant the DOL deference in interpreting its own regulation. The specific reasoning gets a bit intricate and convoluted. Those who wish to read the Supreme Court’s opinion can find it here .
Pharmaceutical sales representatives may be exempt outside sales employees, but what about other types of salespeople? The US District Court for the District of Ohio in Hurt v. Commerce Energy Inc. 1:12-CV-00758 (Aug. 15, 2013) held that door-to-door salespeople for an energy company were not exempt. The solicitors in this case were required to initiate third party verification calls before they left the prospect’s premises, but could not be present during the actual call, and could not return to the premises after the call. The court found this case distinguishable from Christopher, because in Christopher the sales representatives were prohibited by law from entering into binding contracts, whereas here the prohibition originated from the company’s own internal policies. The court seems to have relied heavily on the fact that the employer retained unlimited rejection authority over any potential sale. While US Supreme Court may have settled the question of pharmaceutical sales representatives being exempt from overtime pay, the question regarding other outside sales positions seems far from settled. Bottom line: If you are not in the pharmaceutical industry and you employ salespeople you will want to look closely at how much involvement your salespeople have in the actual sale before you assume that their position is exempt from overtime pay.
Suppose you run a retail business. Are your salespeople entitled to overtime? Not as long as they meet the following requirements:
- The employee must be employed by a retail or service establishment;
- The employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage; and
- More than half the employee’s earnings must be in the form of commissions.
(This exemption also does not include a salary requirement.)
The first two requirements seem straightforward enough. How about the last one? What’s a “commission”? According to the DOL, “to qualify as a commission, an increase in the costs to the consumer must result in a corresponding increase to the amount of payment made to the employee.” This was the DOL’s argument when it filed a brief in support of call center workers for Nutri-System in Parker v Nutri-System Inc. 2010 U.S. App. LEXIS 18691 (3d Cir. Sept. 7, 2010). Call center workers received payments of $18.00 $25.00 or $40.00 per sale, that were not linked to the costs of any particular meal program sold. The Third Circuit Court of Appeals rejected the DOL’s interpretation.Since the payments were not based on the number of hours the employees worked, and appeared to be proportionally related to charges passed on to the consumer, they were, per the Third Circuit, commissions, even though they were flat rate payments and not percentages. Note however that the DOL may still stick to its own interpretation during an audit. Employers who wish to take the “safe” route might want to stick with using percentages!
One more word about these two sales exemptions: An employee whose job only involves occasional sales will not likely fall within either exemption. Remember: the primary functions are the key!
OK, we’re finished with FLSA exemptions–well for now anyway! I reserve the right to return to this topic if there is a new or interesting development in the future! Meanwhile, next week The Emplawyerologist will look at which activities constitute compensable “work” which could trigger — you guessed it — overtime pay! I know it may seem painful, but it’s important, so don’t miss it!
Disclaimer: This post’s contents are for informational purposes only, are not legal advice and do not create an attorney-client relationship. Always consult with competent local employment counsel on any issues discussed here.
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