Overtime Exemption for Inside Sales Employees Not Like Others

Our exempt inside sales employees make a salary plus commission. Do the salary deduction limitations for exempt employees apply to these employees?

No, the salary limitations, also called the salary basis test, apply only to administrative, executive and professional employees classified as exempt pursuant to both the Industrial Welfare Commission (IWC) orders and the California Labor Code, Section 515. The inside sales exemption is completely different.

Deciding to use an exemption requires an understanding of the specific criteria associated with that particular exemption. The subject of exemptions is difficult because explanations and references to exempt categories are commonly grouped together.

It is important to review the different exempt categories and to determine how they interact with the payment of a salary. All exemptions are not the same.

Inside Sales Exemption

The exemption covering inside sales employees exists in the IWC Orders 4 or 7, Section 3 (D) which specifically defines what sections of the order will not apply if you meet the listed criteria.

Section 3 (D) states that subsections 3 (A), (B), and (C) shall not apply to any employee whose earnings exceed one-and-one-half (1½) times the minimum wage if more than half of that employee’s compensation represents commissions.

This exemption is very specific and provides an exemption to the payment of overtime found in Section 3 of the orders and Labor Code Section 510.

All other sections of IWC Orders 4 and 7 are still in force and apply, such as meal and rest breaks, reporting time, timekeeping, etc. Essentially, the inside sales employee remains a nonexempt employee for all other regulations in the IWC orders.

It is OK to pay a salary to an inside sales employee, as long as you meet the payment requirements pursuant to IWC Order 4 or 7, Section 3 (D). Unlike the salary deduction limitations that apply to administrative, executive and professional exempt employees, you are free to make deductions based on absences from work.

Although the regulations do not restrict salary deductions, your particular salary agreement may. Be sure to review the agreement before making deductions.

Consult Legal Counsel

Further, meeting this exemption is complicated. Be sure to review the two-prong definition of commissions before using the exemption. In addition, paying with a salary makes compliance a little more challenging. Considering the difficulty meeting the criteria, it is wise to consult with your own counsel.

Employers that believe they qualify for the state overtime exemption will still need to verify that they meet the exemption under the federal Fair Labor Standards Act (FLSA), which has different exemption requirements and a different definition of “commissions.”

For more information about the complex rules associated with the inside sales exemption, visit the HR Library at HRCalifornia.

Column based on questions asked by callers on the Labor Law Helpline, a service to California Chamber of Commerce preferred and executive members. For expert explanations of labor laws and Cal/OSHA regulations, not legal counsel for specific situations, call (800) 348-2262 or submit your question at www.hrcalifornia.com.

Staff Contact: Barbara Wilber