In one of the previous posts, we discussed how professional, executive and administrative employees are not subject to California overtime and minimum wage laws. Another group of employees that is exempt from minimum wage and overtime pay requirements is commissioned employees.

California employment law recognizes two types of commissioned employees: (1) outside salespersons (Lab. Code  §1171) and (2) inside salespersons (8 Cal.C.Regs. §§ 11040, 11070). This article deals with  the outside salesperson exemption only.

Whether you are an employer or employee, it is crucial that you familiarize yourself with the basic rules. In the past few years, California courts have witnessed a substantial increase in a number of lawsuits filed by commissioned employees against employers alleging minimum wage and overtime violations. The legal consequences of ignoring the rules and misclassifying employees are highly expensive and are not worth the risk.

Legal Standard

Labor Code section 1171 exempts outside salespersons. Ramirez v. Yosemite Water Co (1999). The Industrial Welfare Commission regulations define “outside salesperson” as  any person, 18 years of age or over, 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. (8 Cal.C.Regs. § 11010).

“Selling” vs. “Performing Services” – Differences between State And Federal Laws

During the litigation of the outside salesperson exemption, the main dispute often times revolves around the question whether an employee is really selling stuff or just performing the underlying services. To better understand this issue consider the following example. Many plumbing companies employ a commissioned-based compensation structure where service technicians are authorized and encouraged to negotiate contracts with customers, provide quotes, upsale additional services, all of which would fall under the rubric of “selling.” However, the same service technicians do the  actual plumbing work, which is not “selling.”

The California and Federal courts disagree on how to determine whether an employee is subject to  an outside salespersons exemption. Federal courts use the qualitative approach which focuses on defining employee’s primary functions rather than on the total amount of time spent “selling” products or services. Unlike federal courts, the California regulations employ the quantitative approach, focusing exclusively on whether the employee works more than 50% of the time selling or obtaining orders for products or services.

In Ramirez v. Yosemite Water Co. Inc., the California Supreme Court held that for purposes of interpreting the definition of outside salespersons under the IWC Wage Orders, the lower court must use the CA quantitative approach, as opposed to a federal qualitative approach.  

“More than Half the Working Time:” Job Description Estimate vs. Actual Hours

Is the number of hours worked in sales-related activities to be determined by the number of hours that the employer, according to its job description or its estimate, claims the employee should be working in sales, or should it be determined by the actual average hours the employee spent on sales activity? The California Supreme Court in Ramirez answered this question by looking at realistic requirements of the job, that is the combination of the two perspectives.

The courts should consider the following factors:

(1)  how the employee actually spends his or her time, and  then consider;

(2) whether the employee’s practice diverges from the employer’s realistic expectations;

(3) whether there was any concrete expression of employer displeasure over an employee’s substandard performance, and

 (4) whether these expressions were themselves realistic given the actual overall requirements of the job.”

The court formulated this test so neither employee nor employer can manipulate the numbers in their favor.  An employer may not, through the use of “an idealized job description”, artificially place an employee into an exempt status when the duties imposed on that employee would not “realistically” allow the employee to perform exempt activities more than 50% of the time. By the same token, an employee in an otherwise exempt position may not surreptitiously perform non-exempt duties which are not within the realistic expectations of the employer in order to defeat the exemption.

Applicability

For example, in Cuvillier v Alta Colleges, Inc., (2003, CD Cal), the federal court has found that admissions representatives who enrolled students in colleges were  exempt from California overtime laws, pursuant to Lab. Code § 1171 and Cal. Code Regs. tit. 8, § 11040-2(M). The court explained that activities such as  enrolling students and  ensuring their continued enrollment, tuition payments, and graduation were incidental to and in conjunction with the sales that continued throughout the relationship. Because all of the admissions representatives’ work was either sales or sales-related, they regularly worked more than half-time selling.

In another case, the California Central District Court ruled  that  a pharmaceutical company was entitled to summary judgment in an employee’s action alleging violations of California’s overtime laws because although the employee, as a sales representative, did not sell the company’s products to medical personnel in the classic sense, the employee met all of the indicia relied upon by federal courts to support a determination that she was properly classified as an exempt outside salesperson for purposes of Lab C § 1171. The employee was hired and evaluated based on her ability as a salesperson, received training through the company on sales techniques, received some compensation based on the total amount of products sold in her territory, and solicited new customers on her own. Menes v. Roche Labs, Inc. (2008, CD Cal) .