IS YOUR COMMISSIONED INSIDE SALES REPRESENTATIVE EXEMPT FROM OVERTIME?

“Commission wages” are compensation based proportionately on the value or amount of the item or service sold.  An “inside sales representative” sells merchandise in a store or sales lot or sells products or services via a company telephone.  In contrast, “outside sales representative” means any person, 18 years of age or over, who customarily and regularly works more than half the working time away from the employer’s place of business selling or obtaining orders for a product or service.  The provisions of the California Industrial Welfare Commission Wage Orders (see blog article, “DO YOU KNOW YOUR CALIFORNIA WAGE ORDER?”) do not apply to outside salespersons.

Under California law, a commissioned inside sales representative covered either by Wage Order 4 or Wage Order 7 is exempt from overtime compensation if:

• total compensation exceeds 1.5 times the minimum wage for each hour worked during the pay period (As of January 1, 2008, 1.5 x $8.00 = $12.00/hour); and
• at least 50% of total compensation comes from commissions.

Since the compensation must exceed the $12.00 amount for every hour worked in a week, this exemption has the unique requirement of employee’s accurately tracking work hours each week to ensure he or she qualifies for the exemption.  Whether the sales commission structure is comprised of a base salary plus commissions, pure sales commissions, a draw provided against future commissions or some combination of these, the exemption also requires that each weekly paycheck exceeds $12.00 times the number of hours worked to qualify.

The exemption applies in the case of an employee paid a fixed salary plus an additional amount of earned commissions if the amount of sales commission payments exceeds the total amount of salary payments for a chosen representative period.  If a worker is compensated by pure sales commission, this “51% – 49%” calculation is of course irrelevant.

The representative period a company chooses to establish the plus-50% commissions and minus-50% salary ratio must be at least one month and not longer than one year.  The employer should pick reasonable duration at or between those extremes which yields a fair reflection of the sales person’s true weekly average of earned commissions.  For example, in a company where sales to the public and commissions paid are relatively constant month-in and month-out, then picking a relatively short representative period is reasonable.  In a company that has seasonally high or low periods of sales, then calculating the average weekly figure for commissions should reasonably require a period nearer or at a year’s-worth of activity.  Whatever representative period(s) the employer chooses, the employer must document the average ratio for each employee for each such period.

The employer thus must maintain adequate records that clearly indicate: i) the amount paid to employees exempt under this category; ii) the breakdown of base salary and commission payment for each week; and iii) the number of hours worked each week.  In order to implement the exemption, the employer must also maintain:

• A symbol, letter or other notation placed on the payroll records identifying each employee who is paid  under this inside sales exemption;  and
• A copy of the policy or the specific written agreements with particular employees that lay out the terms of the sales commission structure, including the chosen representative period, the date the agreement was entered and how long it remains in effect.

Note:  The California and federal exemptions and wage and hour laws are not identical.  The comparable federal exemption only applies to retail or service establishments.  Therefore, California employers are cautioned not to rely on the commissioned insides sales employee exemption from overtime without first consulting with an attorney.

If you have any questions, please contact me or any of our other employment law attorneys.   Best, Bob Edwards