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Q.Are sales persons paid on commission entitled to overtime?

A.

The commissioned salesperson exemption from overtime pay is actually quite complicated and the federal laws differ from those of California. Under both federal and California state law, however, there are two different types of exemptions from overtime pay for employees who work on commission. The first applies to inside salespersons (employees who work at their employer’s place of business) and the second applies to outside salespersons (who typically work out of their home).

The first part of this document will address the federal law set forth under the Fair Labor Standards Act (FLSA). It should be noted that almost every business that has gross annual revenues exceeding $500,000 will be covered under the FLSA. The FLSA applies to all businesses whose gross revenues exceed $500,000 and that engage in interstate commerce, produce goods for interstate commerce, or handle, sell, or work on goods or materials that have been moved in or produced for interstate commerce. The second part of the document will address California’s law on overtime pay for commissioned salespeople, which is more stringent than the federal law.

The Commissioned Salesperson Exemption From Overtime Pay Under Federal Law.

Pursuant to Section 7(i) of the FLSA commissioned salespersons who are employed by certain retail and service establishments are exempt from overtime. First, to be considered a retail or service establishment, 75% of the business’ revenues must come from the "retail" sale (not resale) of goods or services. If a retail or service employer who satisfies the above definition of "retail or service establishment" wants to use the Section 7(i) overtime pay exemption for commissioned employees, three conditions must be met:

  • The employee must be employed by a retail or service establishment; and
  • The employee's regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in a workweek; and
  • More than 50% of the employee's total wages in a representative workweek must consist of commissions on the "sale" of goods or services.

Unless all three conditions are met, the FLSA federal overtime pay exemption does not apply, and overtime pay must be paid for all hours worked over 40 in a workweek at one and one-half the regular rate of pay, which includes commissions.

You can review the Department of Labor’s Fair Labor Standards Act as Applied to Retailers of Goods or Services here.

The Commissioned Salesperson's Exemption From Overtime Pay Under California Law

Under California law, there are two, yes two, commissioned sales exemptions from overtime pay: (1) inside sales and (2) outside sales. Inside commissioned salespersons typically work either from the employer's place of business, or from home attempting to make sales through the use of a telephone, email, and/or the Internet. Outside commissioned salespersons typically work from home making sales through in person visits to potential clients/customers, but may also use the telephone and email as an asjunct. Therefore, it should be noted that sales made solely by mail, telephone or the Internet without any in-person visit is considered an "inside" sale whether made from the employee's home, or the employer's place of business.

California's Inside Commissioned Sales Exemption From Overtime Pay.

The exemption from overtime pay for inside sales (telephone and internet sales and other sales whereby the employee is working from the employer’s place of business), only applies to workers employed in either: (1) the mercantile industry which is governed by Industrial Wage Order No. 7 or (2) a professional, technical, clerical, mechanical and similar occupation covered by Industrial Wage Order No. 4.

Industrial Wage Order No. 7 defines the mercantile industry as "any industry, business, or establishment operated for the purpose of purchasing, selling, or distributing goods or commodities at wholesale or retail; or for the purpose of renting goods or commodities." Thus a car sales lot would fall under Wage Order No. 7, but a car wash would not since its primary business is the servicing of vehicles as opposed to the sale of cars. Consequently, an inside sales person hired to sell advising at a car wash would not fall under the inside sales exemption from overtime pay since the employees' of a car wash are not governed by Industrial Wage Order No. 7.

Remember it is NOT what an employee's job description states that determines whether a California inside commissioned sales employee is exempt from overtime pay; what determines whether the California inside sales exemption from overtime pay applies is the primary purpose of the employer's business, and which Industrial Wage Order it falls under.

One of California's 16 Industrial Wage Orders applies to every business. The 16 Industrial Wage Orders include the following:

  1. Manufacturing Industry (which also includes publishers, copy and printing services, dental and optical labs, reproduction facilities, utilities, etc..)
  2. Personal Service Industry (e.g., personal trainer, gym, hair stylist, tanning salon, weight loss center, etc..)
  3. Canning, Freezing, and Preserving Industry
  4. Professional, Technical, Clerical, Mechanical, and Similar Occupations (e.g. accountant, attorney, doctor, architect, appraiser, bookkeeper, copy writers; computer programmer, sound technicians, etc..)
  5. Public Housekeeping Industry (e.g., camp, club, restaurant, nightclub, bar, catering, hotel, motel, apartment, mobile home park, office building, hospitals, rest homes, child care facilities, schools, businesses who provide cleaning services, veterinary and other animal care services, etc..)
  6. Laundry, Linen Supply, Dry Cleaning and Dyeing Industry (e.g. carpet cleaning service, diaper service, dry cleaner, laundry mat, linen supply and cleaning, etc..)
  7. Mercantile Industry (e.g. almost every business whose primary purpose is to buy, sell, rent, or distribute a commodity at wholesale or retail such as an auction house, antique store, bakery, building supply, costume rental, donut shop, flea market, florist, gas station, import/export, mail order, thrift shop, telephone sales, etc..)
  8. Industries Handling Products after Harvest
  9. Transportation Industry (e.g. airline, ambulance company, armored car service, limo, boat, cruise, bus, car rental, car wash, vehicle repair shop, movers, storage facilities, deliveries, courier, taxi, truck rental)
  10. Amusement and Recreation Industry (e.g. arcade, theater, nightclub, racetrack, zoo)
  11. Broadcasting Industry (radio and tv)
  12. Motion Picture Industry (e.g. wardrobe, casting, video and/or film development, production, printing, library, advertising, or distribution)
  13. Industries Preparing Agricultural Products for Market, on the Farm
  14. Agricultural Occupations
  15. Household Occupations (personal care and/or maintenance)
  16. Occupations in the Construction, Drilling, Logging, and Mining Industries

If the employer's business does not fall within either Industrial Wage Order No. 4 or No. 7, then the inside commissioned sales exemption from overtime pay will not apply. For example, it does not apply to insurance brokers, loan officers, pharmaceutical representatives, or construction workers.

California's Outside Commissioned Sales Exemption From Overtime Pay.

For the commissioned outside salesperson to be exempt from overtime pay either: (1) the salesperson must spend more than 50% of his or her time engaging in sales activities (actually making sales not including follow-ups, deliveries, servicing of the account, and collection activities) outside the employer's place of business; OR (2) the outside salesperson must earn more than 1 1/2 times the minimum wage and more than half of the salesperson's compensation must come from commissions. This exemption only applies to overtime pay, and not minimum wage, or any of the other California wage and hour laws including meal and rest breaks.

If you are a commission only salesperson working in California in an industry that is not covered by either Wage Order No. 4 or No.7 (your employer operates a restaurant, moving company, auto repair business, manufacturing company, farm, or is engaged in the motion picture or construction industry) you are probably entitled to overtime pay for all hours worked in excess of 8 in one day, or 40 in one week.




© Copyright 1999-2014 Melissa C. Marsh. All Rights Reserved. All Information on this website is subject to a Disclaimer and Use Agreement. This information is provided as general information only and should not be construed as legal advice. We advise you to seek the advice of competent legal counsel to address your own specific questions, facts and circumstances.