While its administrative and executive siblings often get more publicity, the “outside sales exemption” presents unique challenges for California employers, particularly those that employ large sales teams (even setting aside the administrative challenges surrounding cell phone and other business expenses).
California’s rationale for exempting outside sales personnel from overtime and similar wage-related requirements is straightforward: “Outside sales[people] have historically been exempt ‘because ‘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. (September 8, 1998).
But although the outside sales exemption reflects the difficulty of tracking hours in connection with sales activity, California still requires employers to know what hard-to-track sales employees are doing “on an hour-by-hour basis” to defend the application of that exemption.
Who is an exempt outside sales person?
Federal law: Employees whose “primary duty” is making sales and who regularly work away from the employer’s place of business may be exempt from minimum wage and overtime pay requirements. 20 CFR § 541.500(a). This federal rule is often described as being a “qualitative” test.
California law: The California version of the outside sales exemption (Lab. Code § 1171) is peculiar, by federal standards. Like the federal rule, California’s exemption covers sales people who regularly work away from the employer’s place of business. But California imposes an additional “quantitative” requirement: the employee must spend most of the work day away from the employer’s place of business, engaged in sales activities. California also limits the exemption to sales people who sell tangible or intangible items, or obtain orders or contracts for products, services, or use of facilities. IWC Wage Order 1-2001(2)(j). As a result, California’s outside sales exemption is narrower than the federal exemption.
Why is the California definition problematic?
Under the federal law’s qualitative approach, the focus is on employee’s “primary” function, rather than strictly how much time the employee spends selling. The employee’s level of authority also is important. For example, if the given sales position has broader discretion to enter contracts, then that discretion weighs in favor of exempt classification. But even non-sales work—like attending sales conferences or making incidental deliveries—can contribute to a primary sales function if that work is designed to further the employee’s sales efforts.
Conversely, under California’s quantitative approach, the focus is on whether the employee spends more than 50% of their work time away from the employer’s place of business engaging in sales activities. Thus, the focus tends to shift more towards how each given employee tends to allocate the work needed to perform the job.
A common tenet in managing a salesforce is, “If your sales people are selling, pipe down and get out of the way.” But this mantra, when followed in the context of California’s quantitative exemption test, can lead to ridiculous classification results. For example, long-tenured and highly successful sales people generally achieve their goals by forging bonds with their customers through years of doing business with them. In some industries, once those bonds are forged, the need for frequent customer face time can actually decrease. The customer may no longer want or need “the big pitch meeting” because their sales person has become their trusted advisor: someone who can monitor their needs and product usage from afar, and accomplish more sales with a few phone calls, emails, and infrequent client visits than a junior sales person could ever dream to accomplish visiting the same customer on a weekly basis.
From a qualitative perspective, there can be no doubt that the primary function of both of these individuals—the long-tenured as well as the junior sales person—is making sales and the application of the federal outside sales exemption would be fairly clear.
But a California problem may arise from the sales person’s discretion and allocation of work time. As the long-tenured sales person becomes ever more successful, the percentage of total work time spent “selling out of the office” may begin to drop from 80 to 70, then to 60 percent, and then continue to drop until that sales person’s total percentage of work time spent out of the office dips dangerously close to passing south of the 50% Mason-Dixon line. And while the sales person’s time allocation decisions likely make perfect business sense, that allocation may jeopardize the sales person’s continuing exempt status.
What to do?
In assessing your own exempt classifications, it is helpful to know that California courts evaluate the following factors in considering a disputed classification: (1) how the employee actually spends her work time; and then; (2) whether what the employee actually does differs from the employer’s reasonable expectations about the job; and, if so, (3) whether the employer ever indicated that it disapproved of the employee using her work time that way (as evidence of employer disapproval is a helpful though not dispositive fact); and, regardless of whether the employer did express disapproval, (4) whether the employer’s expectations (and any expression of disapproval concerning the way an employee allocates work time) are realistic given the overall job requirements. With this framework in mind, there are several steps an employer can take to shore up an exempt outside sales classification:
Step One –Job Descriptions. As with all overtime exemptions, employers should create clear job descriptions for exempt outside sales employees that make it clear that the employee’s main duty involves sales, and should re-issue those descriptions periodically. And in California, the job description should also make clear that the employer’s expectation is that the employees should be spending more than one-half of their work time out of the office selling. In performance evaluations and in other regularly issued documents the employer’s performance expectations for the position should play a prominent part.
Step Two – Regular Communication with Sales Force. Checking in with outside sales employees regularly (sales team calls, etc.) can have a multitude of positive ramifications, including permitting the employer to learn more about what its sales people are actually doing in the performance of their jobs on a daily basis.
Step Three – Regular Job Appraisal and Counseling in Writing. If the employee is deviating from the position’s stated job duties to perform excessive non-exempt work, then the employer may want to assess whether something about the business or position has changed that might warrant reclassification of certain positions. Otherwise, the employer may communicate its disapproval to the employee in an appropriate writing to help counter any later challenges to the exempt status of the position.
On the subject of sales, we’re always here to help. Seyfarth’s California Workplace Solutions lawyers can answer any questions you may have and can help you draft or revise policies, job descriptions, and performance assessment tools if you are looking to shore up the exempt status of your outside sales force or if you harbor doubts about the propriety of any exempt sales force classifications.
Edited by Julie Yap