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All employers' mindsets in California should be that it must pay all of their employees overtime. Employees who work in excess of eight (8) hours per day or in excess of forty (40) hours per week are entitled to 1.5 times their normal hourly pay,(i.e. “time and a half”) for that additional time worked. (Labor Code section 510(a).)

There are several, specific, limited exceptions to that rule in California. These exceptions make the employee's additional time exempt from overtime. This particular blog post will be zeroing-in on two overtime exemptions applicable to salespeople in California. 

Please note that in addition to these two exemption types, there are others. However, those are for a blog entry on another day.

California's Commission Pay Exemption

A salesperson is exempt and not entitled to overtime pay if (1) more than half of his or her pay is in commissions, and (2) his or 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 her or 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 his or her earnings are commissions.  If both of these are true, the salesperson is exempt and not eligible for overtime pay.

However, what qualifies as a "commission" in California? Just by calling it a commission does not make it so. 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. (Areso v. CarMax, Inc., 195 Cal.App.4th 996, 1006 (2011); Muldrow v. Surrex Solutions Corp., 208 CalApp.4th 1381, 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.  (Keyes Motors, Inc. v. DLSE, 197 Cal.App.3d 557 (1988).)

As a result, please keep in mind that salespeople who earn less than half of their compensation in commissions are entitled to overtime pay. And employees who receive some payments characterized by their employers as “commissions” but whose primary job duty is not making sales are also entitled to overtime pay.

California's Outside Salesperson Exemption

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).) To be classified as exempt under California law, a salesperson must spend more than half of his or her working hours (1) engaged in "exempt sales activity" while (2) "outside". Employees engaged in outside sales historically have been exempt from overtime because, as the Department of Labor Standards Enforcement (DLSE) 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.)  

It can be difficult to determine whether a particular activity qualifies as an “exempt 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.”  However, the DLSE 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” and therefore counts as a “sales activity” or is merely “incidental to sales."

Usually, it is a tad easier to determine whether an employee is working “outside,” which is defined as “away from the employer’s place of business.” (Cal. Code Regs., tit. 8, § 11070, subd. 2(J).)  One common exception to this rule 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 DLSE 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. 

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 he or she is entitled to overtime pay.