Does The Overtime Exemption Apply To Inside Sales?

Most companies are aware of the “outside sales” exemption to the requirement to pay overtime, but they may not be aware that the Fair Labor Standards Act also provides an exemption to overtime for some “inside sales” employees. When an employee sells a big ticket item, the inside employee exemption is used, providing it meets the following three conditions.

• The retail business or service employing the individual must be recognized as an establishment in which 75% or more of the annual dollar amount of sales are retail sales in the retail or service industry represented, and are not for resale.
• The regular rate of employee pay must be greater than one and one-half times minimum wage for each hour the employee worked during a week when overtime hours are worked.
• The total earnings of the employee must consist of more than 50% in commissions earned.

All three conditions must be met for the exemption to apply, and if the employee worked over 40 hours, he or she must be paid overtime wages.

Regular Rate Calculations

Meeting the rate of one and one-half times the minimum wage is less restrictive for the employer than the normal overtime requirement. To determine if the criterion is met, divide the number of hours worked into the employee’s total earnings, which include commission, a draw on future commissions, and any supplemental payments to increase employee earnings to the required level.

Hotels, motels, and restaurants imposing mandatory charges on customers, which are paid to employees in part or in full, may
count the payment as a commission. This allowance is made due to the direct relationship to the goods and services sold by the establishment and applies to a precise percentage of the consumer’s bill. The tips customers give employees are not to be considered commissions.

There is no requirement to calculate the regular rate every week when an employee’s earnings are consistently one and one-half times the minimum wage in a week when the employee worked over 40 hours. When there is uncertainty about an employee’s earnings in some weeks, it is necessary to calculate the regular rate. When there is a question pertaining to the hourly rate, the Wage and Hour Division will evaluate the facts and determine if the regular rate requirement is being met.

Representative Period

When measuring a representative period for commissions, the time used can be as short as a month and no longer than a year. The representative period of time must be defined in your records, and failure to designate the time period is a direct violation of the record-keeping requirement and can be grounds for the exemption being denied.

If there is reasonable expectation that there will be no difference in compensation when compared to other members of the sales group, a newly hired employee may be treated as meeting the exemption from the beginning of employment.

Commission Payments

If the employee is paid entirely by commission or the commission payments are always greater than salary or hourly wages, it is determined that more than half of the employee’s earnings come from commissions. When this is not the case, the commissions and other compensations during the representative period must be totaled separately. Commission totals must exceed other compensation totals in order to qualify for the exemption. If a department or store manager is paid commissions based on sales, the payments can count as commissions. Although other employees made the actual sales, manager functions contributed to the sales.

Conclusion

Although there are conditions allowing inside sales employees to be exempt from overtime, an employee is not automatically exempt simply because he or she is paid a commission.