Employers are frequently confronted with allegations that employees have been misclassified as exempt from overtime pay. The inside sales exemption is one of the most misconstrued exemptions to overtime pay under both California and Federal law, which unfortunately may result in substantial liability to employers.
California Law
Under California law, the inside sales exemption (commissioned salesperson exemption) applies when the following conditions are met:
- The employees work in an industry governed by Wage Order 4 (professional, technical, clerical, mechanical, or similar occupations) or Wage Order 7 (mercantile occupations).
- The employees earn more than 1.5 times the State minimum wage for each hour worked in each workweek of the pay period.
Employees could be exempt from overtime pay in one pay period and non-exempt in the next pay period. Accordingly, for pay periods that employees are considered non-exempt, the employees must be paid overtime in accordance with California law.
- The employees earn more than 50% of their total earnings in commissions in each workweek and as tested in a representative period of at least one month.
Employers cannot attribute commission wages paid in one pay period to other pay periods to meet minimum wage requirements.
Moreover, it is important to note that employers are required to maintain time records on commissioned employees as those employees are exempt only from overtime requirements and not from meal and rest periods, or other requirements for non-exempt employees.
Federal Law
Under Federal law, the inside sales exemption applies when the following conditions are met:
- The employees are employed by a retail or service establishment.
Retail and service establishments are defined as establishments where 75% of their annual dollar volume of sales of goods or services (or both) is not for resale and is recognized as retail sales or services in the particular industry.
- The employees’ regular rate of pay is more than 1.5 times the applicable minimum wage for every hour worked in a workweek with overtime hours.
When determining if an employer has met this condition, the employer may divide the employee’s total earnings attributed to the pay period by the employee’s total hours worked during said pay period. If the result is greater than time and one-half the minimum wage, this condition of the exemption has been met.
- More than one-half of the employees’ earnings represent commissions on goods and services.
The representative period for determining if enough commissions have been paid may be as short as one month but must not be greater than one year. The employer must select a representative period in order to determine if this condition has been met.
Final Comments
Employers must comply with both California and Federal law when classifying employees as exempt under the inside sales exemption. Employers who classify inside sales employees as exempt should reassess the validity of their classifications considering the conditions discussed above to help ensure minimal exposure.
If you need assistance to further understand how this impacts your business, please contact us at info@mnklawyers.com.
This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create a client-lawyer relationship between MNK Law and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material.
