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Labor, Employment and Benefits
Newsletter - January 2000
 
In this Issue...
Commission-Paid Salespersons Entitled To Overtime Unless Specifically Exempted
 
January 1, 2000
 

Given the complexity of the Fair Labor Standards Act, it is often difficult for employers to determine whether commission-paid salespersons are entitled to overtime pay when they work over 40 hours in a work week. If an employer improperly denies an employee overtime pay in violation of the FLSA, it could be liable for the unpaid overtime, liquidated damages, and the employee's attorneys' fees.

The FLSA requires employers to pay workers who are not exempt from the FLSA's protections (nonexempt employees) overtime pay in an amount of one and one-half times their regular hourly rate for each hour they work over 40 in a work week. This rule generally applies to all nonexempt employees, including those paid by commissions instead of an hourly wage.

Employers often mistakenly believe that their commission-paid salespersons are exempt (and, thus, need not be paid overtime pay) under the well-known and commonly utilized exemptions for "white collar" professionals. However, the white collar exemptions for executive, administrative and professional employees are only available if the employee is paid on a salary basis. That is, the employee regularly receives each pay period a predetermined amount representing all or part of the employee's compensation that is not subject to reduction based upon the quantity or quality of the employee's work. Accordingly, strictly commission-paid employees, by their very nature, cannot fall under the white-collar exemptions.

The FLSA provides three types of exemptions that could apply to commission-paid salespersons. First, commission-paid salespersons could be exempt from overtime pay under an industry-specific or job-specific exemption. For example, the FLSA specifically exempts salespersons primarily engaged in selling or servicing automobiles, trucks, farm implements, trailers, boats or aircraft.

Second, commission-paid employees could be exempt as "outside" salespersons. The exemption for outside salespersons is met if the person is employed "for the purpose of and who is customarily and regularly engaged away from his or her place or places of business" in making sales or obtaining orders. According to FLSA regulations, the outside salesperson must spend at least 80% of his or her time performing duties away from his or her place of business or performing work that is incidental to such off-site work (e.g., preparing order forms, making collections, etc.).

Finally, commission-paid "inside" salespersons could be exempt under a special exemption for commission-paid employees of "retail or service establishments." This exemption applies if the employee works in a "retail or service establishment" (as specifically defined by FLSA regulations) and (1) receives a regular rate of pay that is in excess of one and one-half times the applicable minimum wage and (2) more than half of their compensation represents commissions on goods or services. These employees typically are the salespersons that sell "big ticket" items, such as furniture, major appliances, radios and televisions, and men's clothing.

In sum, in determining whether a commission-paid salesperson is exempt from overtime pay, employers should ask themselves three questions: (1) Does the salesperson fall under an industry-specific or job-specific exemption? (2) Does the salesperson qualify as an exempt outside salesperson? and (3) Does the employee qualify for the exemption for commission-paid employees of "retail and service establishments?" If the answer to all of these questions is "no," then the commission-paid employee is probably entitled to overtime pay.

For more information please call Dennis McClelland at 1-888-688-8500.

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