In a world in which computers and smart phones allow work to be performed at all times and in all locations, the concept of a 40‑hour workweek can often appear to be a relic of the past.

Perhaps that is the reason for the recent increase in claims and litigation under the Fair Labor Standards Act (FLSA), the federal law that requires an overtime premium to be paid once an employee works more than 40 hours in a week unless an exemption applies. The FLSA can be a surprisingly confusing law, with many factors that can transform seemingly exempt employees (to whom overtime is not owed) to non-exempt employees (who are owed overtime). This is especially the case when it comes to the proper treatment of salespersons under the FLSA – including those employed by independent sales rep agencies, as well as by their principals. Therefore, it is important that employers and employees know their respective obligations and rights under the FLSA.

Contrary to what some may believe, there is no general exemption for all sales personnel, even for those whose compensation is based in whole or in part on commission income. Rather, the FLSA provides an “outside sales” exemption that applies to many, but not all, sales employees, under which overtime is not owed to an employee whose primary duty is making sales or obtaining orders away from the employer’s place of business.

Who Does the Selling?

While this exemption appears straightforward, in practice, it has proven anything but. Given the subtleties involved with the outside sales exemption, employers should not simply presume that they are safe from overtime claims from their sales staff. Instead, employers should evaluate whether each member of the sales force is actually selling products or services to customers. The next question that must be asked is whether the sale of these products or services to customers is the most important duty of the employee. If this also is true, the last question is whether the employee is regularly away from the employer’s place of business performing sales calls. Only if all of these elements are satisfied will the outside sales exemption be likely to apply. Also, this exemption is not applicable to “inside sales” employees who work in the employer’s office making sales by telephone or e-mail. Likewise, an employer should be leery about relying on this exemption for those employees whose primary duty involves promotions or customer service, rather than sales. However, the United States Supreme Court is expected to issue a ruling later this summer in which it may decide that employees who promote products are also covered by the outside sales exemption.

For employees not covered by the outside sales exemption, an employer may be able to use other exemptions, such as the “administrative employee” exemption. This exemption is applicable to any employee who receives a salary of at least $455 per week (the “Minimum Salary”), whose primary duty is the performance of office work directly related to management or general business operations of the employer and whose primary duty involves the exercise of discretion and judgment with respect to matters of significance. If anything, the administrative employee exemption is more complicated than the outside sales exemption. Regulations interpreting the FLSA provide that work that directly relates to management or business operations include advertising, marketing, customer service, or public relations. However, in order for advertising or marketing duties to be covered, the advertising or marketing must be directed at a general increase in sales, rather than a particular customer, which is not covered by the exemption. If the employer is satisfied that the employee is performing the right type of work, it should then evaluate the degree of independence that the employee has in performing his or her work, with the likelihood of exemption being applicable increasing with the greater amounts of discretion. Last, in order for the exemption to apply, the employee must receive at least the Minimum Salary, which is not subject to any reduction for absence or poor performance.

In lawsuits involving the administrative employee exemption, the battle usually revolves around whether the employee’s duties are directly related to the employer’s management or general business operations and whether the employee is exercising discretion and independent judgment with respect to matters of significance. Regulations interpreting the exemption state that sales promotions are directly related to the employer’s management or general business operations. However, in order to be covered, the promotional activity must be directed at a general increase in sales, rather than promotions aimed towards a particular customer, which would not fall under the exemption. In order for a sales employee to have discretion and independent judgment with respect to matters of significance, he or she must be free from immediate supervision and be able to craft his or her own marketing or advertising plans with minimal to no input from the employer.

Additional Exemptions

There are other FLSA exemptions that may be applicable to particular types of sales positions. For example, a sales employee may be covered by the “executive” exemption if the employee’s primary duty is management of the sales department or a recognized subdivision of the sales department (e.g., the “Western Region,” “Internet Sales,” etc.), the employee regularly supervises the work of at least two subordinates, the employee has the authority to hire, promote and fire other employees or to make recommendations about hiring, promotions or terminations that are given particular weight by higher-level management, and the employee receives the Minimum Salary. Additional exemptions may be available for sales employees who need a professional background for their sales (i.e., engineers selling specialized equipment) or salespeople whose duties require them to be computer programmers or computer systems analysts.

Although many employers believe that they understand the overtime law, it is far more complicated than is commonly believed. Given the penalties imposed for a violation of the FLSA, which include, at minimum, payment of all unpaid overtime wages for a two-year period, payment of liquidated damages equal to the unpaid overtime wages, and the employee’s attorneys’ fees, it is far better for an employer to be safe than sorry by determining how the FLSA and its exemptions, including those discussed above, may apply to its employees.