When is a Salesperson Entitled to Overtime Pay in California?
The default rule is that California employers must pay all their employees overtime. Employees who work overtime are entitled to 1.5 times their normal hourly pay, or “time and a half” for each hour worked over 8 hours per day or 40 hours per week. Lab. Code 510, subd. (a). However, there are several categories of positions that are exempt from this protection. Employees in these “exempt” positions are not entitled to overtime pay. This post focuses on two exemptions applicable to salespeople in California: the “commission pay” exemption and the “outside sales” exemption.
California’s Commission Pay Exemption
The first exemption, the exemption for employees who are paid primarily in commissions, is relatively straightforward. A salesperson is exempt and not entitled to overtime pay if more than half of her pay is in commissions, so long as her hourly earnings are more than 1.5 times the minimum wage. See Cal. Code Regs., tit. 8, § 11040, subd. 3(D). In most cases, the question whether the commission pay exemption applies can be determined by looking at the salesperson’s pay documentation and hours worked to determine whether (1) she earns at least $13.50 per hour (the California minimum wage of $9.00 per hour multiplied by 1.5), and (2) over half of her earnings are commissions. If both of these are true, the salesperson is exempt and not eligible for overtime pay.
However, some employees who receive more than half of their pay in “commissions” may still be entitled to overtime pay because not all payments an employer designates as “commissions” are actually considered commissions, under California law. See Ramirez v. Yosemite Water Company, Inc., 20 Cal. 4th 785, 803-04 (1999). To qualify as a commission, a payment must be based on the amount or value of the sale of the employer’s goods or services that are sold by the salesperson. Harris v. Investor’s Business Daily, Inc., 138 Cal. App. 4th 28, 37 (2006). Courts have held that commission pay may be based on the number of sales made by the salesperson, the value of the sales, or the employer’s profit on the sales. See Areso v. CarMax, Inc., 195 Cal. App. 4th 996, 1006 (2011); Muldrow v. Surrex Solutions Corp., 208 Cal App. 4th1381, 1395 (2012). But a payment based on the actual production of a good or rendering of a service is not a commission under California law. See Keyes Motors, Inc. v. DLSE, 197 Cal. App. 3d 557 (1988). A car mechanic whose wages are calculated as a percentage of what the car owner pays the mechanic’s employer is not being paid a “commission.” Id. A widget manufacturer whose pay is based on the number of widgets she produces per hour isn’t either.
In sum, most frontline salespeople who earn less than half of their compensation in commissions are entitled to overtime pay, as are some employees who receive payments characterized by their employers as “commissions” but whose primary job duty is not making sales.
California’s Outside Sales Exemption
The second exemption—California’s “outside sales exemption”—is more complicated to apply. Under California law, an “outside salesperson” as a person who “customarily and regularly works 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.” Cal. Code Regs., tit. 8, § 11070, subd. 2(J). Employees engaged in outside sales historically have been exempt from overtime because, as the Department of Labor Standards Enforcement has observed, “it’s very difficult to control their hours and working conditions. They set their own time, and they’re on the road, they call on their customers . . . . [R]arely do you know what they are doing on an hour-by-hour basis.” DLSE Op. Ltr.1998.09.08 (quoting Transcript of IWC meeting 2/23/96, p. 148). To be classified as exempt under California law, a salesperson must spend more than half of her working hours (1) engaged in exempt sales activity (selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities) while (2) outside (away from the employer’s place of business).
It can be difficult to determine whether a particular activity qualifies as “sales activity” for purposes of determining whether a position falls under the outside sales exemption. The California Supreme Court has held that time spent “directly involved in selling items” or “obtaining orders or contracts” counts toward the outside sales exemption, but time spent on tasks that are merely “incidental to sales” does not. Ramirez v. Yosemite Water Company, Inc., 20 Cal. 4th 785, 797 (1999). Applying this distinction, the Court found that delivering bottled water that had already been sold was “incidental to sales” and did not count as “sales activity.” Id. However, the Department of Labor Standards Enforcement has concluded that activities “performed in conjunction with the sales efforts of the outside salesperson” such as loading a vehicle with samples and advertising material is considered “sales activity.” DLSE Opinion Letter 1994.07.14. In some cases, it is unclear whether a particular activity is “performed in conjunction with sales efforts” (loading the truck) and therefore counts as a “sales activity” or is merely “incidental to sales” (delivering the water) and does not count.
Usually, it is easy to determine whether an employee is working “outside” or “away from the employer’s place of business.” Cal. Code Regs., tit. 8, § 11070, subd. 2(J). One common exception is when a salesperson works at a location that is owned or controlled by the employer but is not the employer’s principal place of business or administrative headquarters. For example, the Department of Labor Standards Enforcement has found that a salesperson who works out of a temporary trailer or model home selling homes in a new development is working at the “employer’s place of business,” even though the salesperson is not working at the builder’s headquarters office. DLSE Opinion Letter 1998.09.08, at p. 2; see also Maddock v. KB Homes, Inc., 248 F.R.D. 229, 242 (C.D. Cal. July 9, 2007).
Similarly, it sometimes can be difficult to determine whether a salesperson spends more than half her working time away from the employer’s place of business, particularly when an employee splits her time between working in a fixed location and out in the field making sales. Courts make this determination based on an assessment of the employer’s realistic job expectations, which primarily is informed by how the employee actually spends her time. Ramirez, 20 Cal. 4th at 802.
In short, many, but not all, field salespeople are exempt and not entitled to overtime pay. As a rule of thumb, the more time an employee spends outside of the employer’s office or headquarters, engaged in activates that result in or are closely related to sales, the less likely it is that she is entitled to overtime pay.
How to Determine Whether a Salesperson is Entitled to Overtime
This post only covers salesperson-specific exemptions under California law. Federal law contains separate, though largely overlapping, exemptions, which also apply to California sales positions. Other exemptions, such as those covering administrative employees and managers, might apply to some sales positions. Salespeople who believe that they may be entitled to overtime pay and employers seeking to determine whether they can classify sales positions as exempt should contact an experienced employment law attorney for advice.