Can Companies Use the Outside Sales Exemption During a Pandemic?
December 10, 2020
By Jennifer R. Yee, Joshua R. Woodard, Christy D. Joseph, and Tiffanny Brosnan
COVID-19 has altered the way nearly every employee performs their work. Videoconferencing and phone calls have largely replaced in-person visits and face-to-face meetings in many workplaces. By extension, many sales employees who used to visit customers in person now do so remotely. While convenient, this practice may compromise their status as exempt employees under federal and state wage laws, thus forcing many employers to get creative to stay in compliance.
The Outside Sales Exemption
The federal Fair Labor Standards Act (FLSA) generally requires covered employers to pay nonexempt employees at least the federal minimum wage for all hours worked and overtime compensation of at least 1.5 times an employee's regular rate of pay for each hour worked over 40 in a workweek.1 Many states and municipalities have their own, more stringent minimum wage and overtime requirements. For example, a nonexempt employee under California law must receive overtime premium pay for all hours worked over eight in any day or 40 in any week and are subject to higher minimum wage requirements.2
Outside salespersons are generally exempt from federal and state minimum wage and overtime requirements, including the weekly salary requirements that apply to other exemptions. Given the pandemic, however, satisfying the requirements of the outside salesperson exemption may be difficult.
Under the FLSA, the outside sales exemption is available for an employee:
- Whose primary duty is making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
- Who is customarily and regularly engaged away from the employer's place or places of business.3
“Customarily and regularly” away from the employer’s place of business is defined as more often than occasional but may be less than constant. In other words, work normally performed every workweek satisfies the requirement but isolated or one-time tasks do not.4
More importantly, the concept of the “employer’s place of business” is a broad one under both state and federal law. For example, outside sales does not include sales made by mail, telephone or the internet unless such contact is used merely as an adjunct to personal calls. Thus, any fixed site, whether home or office, used by a salesperson as a headquarters or for telephonic solicitation of sales is considered one of the employer's places of business, even though the employer is not in any formal sense the owner or tenant of the property.5 In other words, sitting in one’s home office making sales calls on Zoom or GoToMeeting generally will not make an outside salesperson exempt under the law.
California’s outside sales exemption takes a qualitative approach, where the salesperson must customarily and regularly work more than half the working time away from the employer's place of business selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities.6 Thus, if the salesperson is generating sales 40 hours a week but only leaves the house one or two days a week for sales-related tasks, California’s exemption test likely will not be satisfied.
In a pandemic environment where a salesperson may physically leave the house only occasionally for sales-related work, these exemption tests may prove difficult for employers. Stay-at-home orders, required social distancing, businesses’ restrictions on visitors and the mere fact that many customer representatives are working from home means that outside salespersons are forced to remotely connect with customers more than ever to maintain relationships and perform their job duties.
Lack of Regulatory Guidance and Employer Solutions
Notably, there has been no legislative or regulatory fix for this issue. In 2020 thus far, the U.S. Department of Labor’s Wage and Hour Division (DOL) has issued two opinion letters regarding the FLSA’s outside sales exemption, and neither one altered the analysis or provided a solution to the issues noted above.7
Thus, employers should consider exploring their own solutions to remain in compliance, such as temporarily reclassifying outside salespersons under another available exemption, like the exemption for commissioned retail sales employees.
FLSA Section 207(i) provides an overtime pay exemption for certain retail sales employees paid on a commission basis. This exemption applies if three conditions are met:
- The employee is employed by a retail or service establishment;
- The employee's regular rate of pay is more than 1.5 times the applicable minimum wage in workweeks during which they work overtime hours; and
- Commissions on goods or services represent more than half of the employee's compensation for a representative period.8
However, this commissioned retail sales exemption is an overtime only exemption. Exempt commissioned retail sales employees are still subject to the minimum wage requirement, which means that employers must, among other things:
- Track the salesperson’s hours worked;
- Ensure that minimum wage requirements are being met; and
- In jurisdictions such as California, ensure that their required meal and rest breaks are being provided–a concept that can prove tricky when many salespersons are working remotely and not used to tracking their activities by the hour.
There is no “one size fits all” solution, but employers—particularly those with employees in Arizona, California and other states with their own wage and hour requirements—should consider consulting with legal counsel if they have any questions regarding the proper classification of their exempt employees.
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