Most employers that pay their outside sales representatives on a commission basis do so because of long-established practices, rather than a sound understanding as to how the Fair Labor Standards Act (“FLSA” or “Act”) impacts such a compensation practice. Generally, the Act requires employers to pay their non-exempt employees compensation at a rate equal or greater than the federal minimum wage and overtime pay if employees work more than 40 hours in the same workweek. The FLSA, however, includes an exemption from both its minimum wage and overtime obligations for outside sales representatives that satisfy the law’s requirements for the outside sales exemption.
To obtain the benefit of the outside sales exemption, the duties that the employees perform must satisfy the Act’s requirements. Neither an employee’s job title nor her job description, however, can convert an employee who performs job duties inconsistent with the FLSA’s requirements for the exemption into an exempt employee.
The outside sales exemption provides employers with significant cost-savings over the alternative of either an hourly wage or salary basis of compensation for its outside sales force. It also gives the employer greater flexibility in scheduling and monitoring of its sales representatives working hours. The employer’s business model for its sales force paid on a commission basis typically requires its members to be exempt from overtime, at least.
The application of the outside sales exemption to an employer’s sales force frequently poses challenges to an employer. In the end, an employer must have the ability to prove that its sales workers meet the criteria for the outside sales exemption. Both the Act and the Department of Labor’s regulations impose specific requirements for the exemption to apply. If an employer misjudges whether a given worker fulfills those requirements, then that misjudgment may undermine the employer’s entire compensation program for its sales force. Misclassification claims can cost employers dearly, especially for highly compensated employees.
1. The Outside Sales Exemption Requires Workers Who Do Their Selling away from the Employer’s Place of Business.
The exemption has two fundamental requirements. First, exempt outside sales workers must either make sales or obtain orders or contracts for services or for the use of facilities in exchange for consideration paid by the client or customer. Second, the worker must customarily perform his work somewhere other than the employer’s business premises. Typically, this requirement means that the employee makes sales calls on customers either at the customer’s place of business or home.
The individualized nature of an outside salesperson’s work and the irregularity of the hours that she or he works to obtain a sale make payment based on a fixed wage or salary uneconomical for employers. Typically, outside sales representatives share the following work characteristics:
- They work alone.
- They do their work away from the employer’s place of business without any direct supervision.
- Outside sales workers choose how many hours they work, set their own schedules, which vary widely, keep no records of their hours worked, and their employers do not track their hours.
- They earn sales commissions only to compensate them for all hours worked, including overtime hours.
- Outside sales representatives’ individual ambition affects their earnings.
The regulations governing the outside sales exemption, furthermore, make sales trainees ineligible for the exemption.
2. Exempt Outside Sales Workers Must Have Sales as Their Primary Duty.
a) Primary Duty:
To be exempt, outside sales representatives must make sales or obtain either orders or contracts as their primary duty. In other words, the most important task that they do must involve selling. To determine whether a worker’s primary duty concerns selling requires an analysis of all the relevant facts considering her or his job as a whole. Specifically, such an analysis includes:
- The relative importance of the exempt sales related duties compared to other types of duties.
- The amount of time spent performing exempt work.
- The employee’s relative freedom from direct supervision.
- The relationship between the employee’s commissions and the wages paid to other employees for the kind of nonexempt work performed by the employee.
The workers’ amount of time devoted to selling provides an indicator as to whether her or his primary duty involves exempt sales related duties. Thus, a sales representative who spends more than one-half of her or his time performing such duties satisfies the primary duty requirement. The Department of Labor’s regulations, however, recognize that an employee could spend less than fifty percent of her or his working time doing sales related duties and still fulfill the primary duty criteria.
Those regulations view activities directly and closely related to exempt sales duties as exempt duties for purposes of determining the primary duty requirement. Directly and closely related means tasks related to exempt duties that also enable or facilitate the performance of exempt work. Those tasks include both:
- The physical and menial tasks necessary to do exempt duties.
- The routine work allows a sales employee to perform the exempt work properly.
Examples of those tasks include activities such as:
- Taking notes,
- Using a computer to create documents or presentations,
- Opening mail to read it and make decisions, and
- Using a copier or fax machine.
To determine whether making sales involves an employee’s primary duty, courts examine the tasks that a sales employee actually does as opposed to deferring to job titles and descriptions. They further consider all the circumstances, including factors, such as whether:
- the employer recruited the employee because of sales experience and ability and advertised the job as a sales position;
- the employer hired the employee for a sales position and designated her or him as a salesperson;
- the employee receives sales training;
- the employee must solicit new business;
- the employee earns commissions on sales or the employer otherwise provides other incentive or performance-based compensation to the worker; and
- the employer provides little or no direct or constant supervision to the employee.
b) Making Sales:
The FLSA defines sales broadly. It means any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.
The Supreme Court has interpreted “making sales” for purposes of the outside sales exemption to require a flexible and functional approach, rather than a rigid and formal one. Using that approach, a court examines an employee’s duties in the context of the employer’s industry, particularly if the employer’s industry has its unique methods of selling and regulatory environment.
Exempt outside sales work covers a wide range of activities. It includes selling goods. Obtaining orders or contracts for either services or the use of facilities also involves sales work. The exemption covers employees who sell or take orders for services even if someone other than the salesperson performs the services. Obtaining orders for “the use of facilities” includes the following examples:
- selling radio or television time;
- soliciting advertising for newspapers and other periodicals; and
- soliciting freight for railroads and other transportation agencies.
c) Commitment to Buy:
The Department of Labor considers two factors as hallmarks of an outside sales employee having a primary duty of making sales. First, the employee must obtain a customer’s commitment to buy. Second, the employee must receive credit for the sale to a customer that makes such a commitment. The Supreme Court has rejected a mechanical analysis that requires the full consummation of a transaction or transfer for a sale to occur. It explained that technicalities must not defeat the application of the outside sales exemption. The facts of the case before the Supreme Court involved pharmaceutical sales representatives. The regulations governing pharmaceutical sales prohibited the sales representatives from completing the sale. The absence of a similar regulatory environment could produce a different result where the employee takes an order and the employer has reserved the right to accept or reject the order in its discretion.
d) Incidental Work:
The incidental duties that outside sales employees perform in connection with their making sales or solicitations involve exempt duties if they further the employee’s sales. For example, incidental work that furthers the employee’s own sales efforts include:
- preparing sales reports;
- maintaining the employee’s sales or display catalog;
- developing itineraries; and
- going to sales conferences.
e) Promotional Work:
Exempt outside sales duties may include promotional work. If the worker does these duties in conjunction with her or his either outside sales or solicitations, such promotional activities involve exempt work. For instance, an outside sales employee may do tasks, such as the following examples with the intention of making sales:
- erecting or disassembling displays;
- removing damaged stock; and
- rearranging merchandise.
The employee, however, must perform duties like these to support her or his own sales activities. If the performance of such duties assist another worker’s sales, the promotional work is not exempt. Thus, if an employee erects displays or rearranges merchandise but has no selling duties, then she or he has not performed exempt work for purposes of the outside sales exemption.
3. The Exemption Requires the Employee to Make Sales away from the Employer’s Business Premises.
To qualify for the outside sales exemption, an employee must make sales outside of the employer’s business premises. In addition, she or he cannot work from any fixed location to satisfy the exemption’s requirements. The Department of Labor treats any fixed site, including the employee’s home, regularly used as a headquarters or to make telephone or internet sales, as one of the employer’s places of business. It makes no difference whether the employer neither owns nor leases the location. An outside sales employee rather makes sales at either:
- a customer’s place of business or
- a customer’s home.
Similarly, the outside sales exemption excludes sales made by any one or more of mail, telephone, or internet unless that contact merely supplements in person sales calls. An otherwise exempt outside sales worker, however, does not lose the exemption if she or he uses a location temporarily to display either:
- samples in a hotel during trips from city to city or
- the employer’s products at a trade show of short duration, such as two weeks or less.
In closing, the outside sales exemption form the Act’s minimum wage and overtime obligations has very specific requirements. Employers who have claimed the exemption for any of their sales representatives without carefully analyzing whether those representatives meet the exemption’s requirements risk unexpected liability for unpaid overtime, liquidated damages, and attorneys’ fees. To avoid those consequences, they should consult with a labor and employment law lawyer. For more information about the FLSA’s outside sales exemption, please contact Gerry Richardson, (314) 552-4053, firstname.lastname@example.org.