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Are salespeople exempt from overtime?

“But I don’t have to pay overtime to my salespeople, right?” is a common question asked at Labor Brain presentations. Many employers assume that their salespeople are exempt from overtime. This assumption comes from the fact that the Fair Labor Standards Act (FLSA) contains two overtime exemptions for sales employees.

However, not all sales employees are included under those two exemptions and large overtime liability can result from a misclassification of some or all of your sales staff. To determine whether or not your salespeople are exempt from overtime let’s take a closer look at the two principal sales exemptions: 7(i) and outside sales.

The first exemption from overtime is referred to as “7(i)” or the “commission exemption”. For this exemption to apply, the employee must meet all three of these criteria:

  1. Be employed by a retail or service establishment as defined in the regulations
  2. Make at least 1.5 times minimum wage
  3. Make more than 50 percent of their pay in commissions

The definition of “retail or service establishment” in the FLSA is one that sells products or services to the final consumer, business to individual, as opposed to business to business, and whose annual dollar volume of sales is at least 75 percent non-resale. Common industries that take this exemption are hair dressers, retail clothing stores, plumbers and banquet servers.

If the sales employee works at a bona fide “retail or service establishment”, he/she must make at least time and one half minimum wage on an hourly basis. This does not mean that the employee must be paid an hourly wage. It means that each week, if his/her total pay is divided by his/her total hours, the rate must be greater than 1.5 times minimum wage, which amounts to $10.88 for federal compliance.  

In addition, the employee must make more than 50 percent of their pay from commissions. This is determined by looking at a representative period set by the employer that can be as short as one month or as long as 12 months.

The second exemption that applies to sales employees is called the outside sales exemption. It applies to employees whose primary job duty is “making sales” and who is primarily engaged AWAY from the employer’s place of business. An employee who makes sales from the main office or a satellite office or a home office is not engaged away from the place of business. There are no federal pay requirements for employees who meet these two criteria of an outside sales exemption.

In addition to these two main categories there are other smaller overtime exemptions in the FLSA that could apply to salespeople including car salesmen and others. If your business is also covered by state labor law, you should check to make sure that these exemptions also apply on a state level.  

So if you employ salespeople, don't assume that they are exempt from overtime. You should be able to point to the exemption in the FLSA that applies to your sales employee and explain why he/she meets the criteria for that specific exemption. And don’t forget that if you are employing non-exempt sales staff, all of their non-discretionary bonuses and commissions must be included in their overtime rate!

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Kalen Fraser

Kalen Fraser is the President/CEO of The Labor Brain Inc., a labor law consulting firm located in Fort Collins.  Ms. Fraser worked in the U.S. Department of Labor and conducted investigations on hundreds of companies to determine their compliance with federal labor laws including the Fair Labor Standards Act, Davis-Bacon Act, Service Contract Act, Family Medical Leave Act and the H2A and H2B guest worker programs.  She created The Labor Brain to respond to a growing need in the business community for expert guidance on how labor laws are enforced. She can be reached at kalen@laborbrain.com. More information on the The Labor Brain is available at www.laborbrain.com.

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