The FLSA is poorly understood. So, over the next several months, I will be writing a series of blog posts on the FLSA. The goal of these posts is twofold: First, to help individuals/employees whose rights have been violated. Second, to help companies better understand the law so they can change their policies and comply with the law. This post focuses on the FLSA as it applies to employees who are paid on a pure commission basis. Many pure commission employees are classified as independent contractors, so I will touch upon that issue as well. Let’s start there.
I. Many Actual Employees Are Improperly Classified as Independent Contractors
The issue of employee classification – as an actual W2 employee or 1099 independent contractor – is a hot topic in law and business. Every few weeks, there is breaking news regarding another massive misclassification lawsuit. The reason why this is so important from an FLSA/overtime standpoint: Because independent contractors are not entitled to overtime, but many W2 employees are (even if they were improperly classified as independent contractors). The question of independent contractor vs employee is not an easy one. In fact, there are roughly 20 factors that the IRS (and courts) use to make that determination. Some of the most important factors:
- Amount of control the company has over the individual.
- Continuity of relationship; whether the relationship is ongoing.
- Integration into the company’s business
- Flexibility of schedule (or lack thereof).
Although the test is extensive and complex, the bottom line is this: If the company controls when a person works, where that person works, what that person does, and how they do it, that person needs to be classified as a W2 employee. And if they are classified as a 1099 independent contractor, then they are being misclassified.
II. Evaluating Possible FLSA Exemptions
Employees (or misclassified contractors) who are paid pure commission are often involved in sales. Let’s consider which FLSA exemptions could apply. The first and most logical possible exemption is the Outside Sales Exemption. Under the FLSA, outside sales employees are exempt from overtime pay. Not only that, but there is no minimum salary that a company has to pay outside sales employees in order to trigger the exemption. At first, that sounds plausible, but it quickly falls apart when further scrutinized. Under the FLSA and related case law, the outside sales exemption only applies to employees who sell on the road; door to door; at the customers’ place of business. If the employee regularly works from any fixed location (an office; a home office; a co-working space), the exemption does not apply. If the employee primarily sells via phone and internet, the exemption does not apply. Remember: The FLSA was written in the 1930’s. It’s outdated. Companies attempting to ride on the outside sales FLSA exemption in 2020 are playing with fire. Upshot: In 2020, the vast majority of sales employees do not qualify as “outside sales people” under the FLSA and are not exempt on that basis.
There numerous FLSA exemptions, but none of the other exemptions likely apply for two key reasons: First, certain of the other exemptions require a minimum weekly salary of $684. Pure commission jobs do not pay any minimum salary. Second, certain of the other exemptions require involvement in managing the company’s affairs or management and supervision of multiple other employees. Most people hired to do sales are not also hired to do management.
Based on the foregoing, many employees (or improperly classified independent contractors) who are paid straight commission potentially have FLSA claims. Ultimately, this requires a fact-intensive, case-by-case analysis.
One final note: In some instances, employees who are paid pure commission earn substantial sums of money. Many people (including lawyers) often assume that someone earning $300,000 or $400,000 a year is automatically exempt from the FLSA. As strange as it may seem, that is not the law. Several years ago, a group of sales employees who were paid pure commission and earned hundreds of thousands of dollars per year prevailed in an FLSA lawsuit.
Jonathan Pollard is the principal of Pollard PLLC. The firm and its lawyers have extensive experience litigating and arbitrating a range of employment-related matters, including FLSA and unpaid wage claims. Pollard PLLC can be reached at 954-332-2380.