With minimum wage increasing at federal, state, and local levels and with wage and hour cases on the rise, we receive many questions about exemptions to overtime laws. One such exemption that does not get as much coverage as others is the “outside sales exemption.” If your company has an outside salesperson – selling goods or services – this may be an exemption for you.
The Federal Basics
The federal law governing wages and hours is called the Fair Labor Standards Act (FLSA). The FLSA requires minimum wage for all hours worked and wages at one and one half times the base rate of an employee for all hours worked over 40 in a work week. There are exemptions from the minimum wage and overtime requirements that fall into two basic categories. One is for supervisory employees who are paid a salary, and the other is for employees in “outside sales” positions. In general, to meet the exemption, an employee’s “primary duty” must be “making sales” or “obtaining orders” and he or she must be “customarily and regularly engaged” away from the employer’s place of business. Notably, there is no particular pay method required to meet this exemption as there is for other FLSA exemptions.
For clarity, the regulations define these important terms as follows:
- Primary Duty: The primary duty is the principal, main, majority, or most important duty that the employee performs.
- Sales: Sales include any sale, exchange, contract to sell, shipment for sale, or other disposition.
- Away: Away can mean the customer’s place of business or home or some other selling location (a hotel is an example) but not the employer’s place of business whether by telephone or by internet or in person.
Check State Laws
Companies wishing to use the outside sales exemption must be careful of state laws regarding overtime as well. Many states have no law at all or else have a law but follow the federal requirements for the exemption exactly. Other states, however, have a unique test for the exemption or even have very specific limits on how much non-sales work an employee can perform without losing the exempt status. For example, an employee can spend no more than 20 percent of his time on non-sales activities in Pennsylvania or else the exemption is lost.
- Make sure your employee is selling something. Needless to say, this is fairly important. Job descriptions should have the word “sell” in them a lot.
- Limit administrative or clerical work.
- Emphasize that the work should be performed at the customer’s place of business or the customer’s home if applicable.
- Make sure that the compensation structure is commission based and distinguishable from the pay methodology for other employees.
- Minimize direct supervision of your exempt outside salesperson, especially over “tasks” or repetitive work. The supervisor’s focus should be on sales goals.
- If some sort of tracking is used, make sure the tracking is of sales goals and not hours worked.
- Minimize work “on the phone” from the office or a fixed location.
- Make sure that any promotional work is done for the employee’s own sales.