For decades, companies have utilized the “outside sales” exemption of the FLSA to employ sales representatives on a pure commission basis. This makes sense. Under the FLSA, there is no minimum salary required for outside sales employees. As such, a company can hire dozens of sales people with no salary cost and pay them based solely on the sales they generate. But, as with many aspects of the FLSA, the outside sales exemption is poorly understood. In fact, many companies that think they are covered by the outside sales exemption are actually violating federal overtime law. And with the current Covid-19 pandemic, the landscape has rapidly changed, meaning companies that may have been covered by the outside sales exemption no longer are. Let’s unpack this.
Outside Sales. Many companies assume that any employee engaged in sales is automatically covered by the outside sales exemption. This is false. The outside sales exemption was truly designed to cover traveling sales people. Remember, the FLSA is from 1938. We are talking about door-to-door sales people. In today’s world, we are talking about sales people who are on the road visiting customers and attending industry events and trade shows. Even before the current pandemic, relatively few sales people fell into that category. Example: A sales employee who works in an office doing sales primarily via telephone and email. That person does not qualify as an outside sales employee and is not exempt from overtime pay. Thousands of companies throughout the country have been engaged in this specific FLSA violation for decades.
And now, with the current pandemic, very few salespeople are actually on the road making sales calls. Most sales people are working from home. Does doing sales from a home office count as outside sales under the FLSA? No. In fact, if the employee works from any fixed location as a home base or headquarters, that employee does not qualify as an outside sales employee under the FLSA.
One issue that commonly arises in these cases: The employee does sales but also has other job responsibilities. For instance: Miami Yachts sells yachts and yacht charters. Jim is a sales person at Miami Yachts. But, in addition to sales, the Company requires Jim to provide administrative support at the office, make copies, get the mail, deposit checks, and run all sorts of errands. Jim spends 60% of his time on sales and sales-related work and 40% of his time providing administrative support. Jim is not exempt under the outside sales exemption. In fact, recent Department of Labor guidance indicates that an employee is not covered by the outside sales exemption unless they spend 80% of their time on sales activity.
Finally, a word about highly compensated employees. Certain sales people make lots of money. Companies often assume that if a sales rep makes, e.g., $250,000 per year, that sales rep certainly is not entitled to overtime pay. But that is not the law. The FLSA does contain an exemption for highly compensated employees. But those employees must be performing work covered by specific FLSA exemptions for executive, administrative, or professional work. A pure sales role usually does not entail work that is covered by those other exemptions. One of the best examples: There have been several cases involving highly-compensated real estate agents. The wrinkle here: The real estate agents in these cases have usually been misclassified as 1099 independent contractors, but their work is tightly controlled by the company (meaning they should have been classified as W2 employees). Once that misclassification is corrected, these employees often have substantial overtime claims.
Jonathan Pollard is the founder of the Fort Lauderdale, Florida based law firm Pollard PLLC. The firm and its attorneys have extensive experience litigating a variety of employment claims, including claims for unpaid wages, overtime wages, and wage theft. The firm’s office can be reached at 954-332-2380.
