Benefits and Compensation

Outside Sales Exemption 101

If your organization is growing right now as the economy comes back to life, you may be considering expanding your sales force. Some organizations are looking to hire more sales people and may not already be familiar with the outside sales exemption that is part of the suite of exemptions to overtime pay regulations within the Fair Labor Standards Act (FLSA).

Sales

The Department of Labor (DOL) has a fact sheet outlining the details for an employee to qualify for the outside sales exemption. It notes:

“To qualify for the outside sales employee exemption, all of the following tests must be met:

  • The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
  • The employee must be customarily and regularly engaged away from the employer’s place or places of business.

The salary requirements of the regulation do not apply to the outside sales exemption.”

As you can see, the requirements for this exemption are pretty clear: The employee must have a primary duty of sales and must typically be outside of the workplace to do so. The DOL stipulates that “sales” includes any sale, exchange, contract to sell, consignment for sales, shipment for sale, or other disposition.

One of the biggest reasons employers like to take advantage of this particular exemption for outside sales employees is that, unlike other FLSA exemptions, it has no salary basis requirement.

This is what allows outside sales representatives to be paid primarily on commission, even if that commission amount varies week to week and isn’t always consistent. Not only do those who qualify for the outside sales exemption not have to be paid on a salaried basis or minimum wage, but the exemption itself means they’re not required to be paid overtime either.

Given that the hours worked by sales representatives can vary significantly day to day and week to week, this is a significant advantage for employers because it means hours worked don’t need to be tracked.

However, employers considering classifying employees as outside sales representatives to take advantage of this particular exemption should be aware that they must meet the regulatory stipulations or risk facing major penalties for misclassification; several years of back pay and other penalties could apply in that case.

Other tips for employers looking to utilize this exemption:

  • Communication with the employee, especially right at hiring, is necessary to be sure the employee understands. In this situation, employees are not required to be paid overtime or even minimum wage. The commission they are paid can vary week to week or month to month and still meet the legal requirements (even if some weeks, they are paid less than minimum wage), as long as they meet the stipulations of the exemption.
  • Pay attention to state and local laws that may have stricter guidelines to follow. In particular, some states have specific restrictions on how much administrative work an outside sales representative can be expected to do without losing the exemption.
  • Ensure the work is done outside of the primary place of business. Limit telephone and Internet work for this reason.
  • To reduce the risk of losing the exemption, limit other nonsales tasks to those that directly benefit the sales function of that specific individual.

The main reason this exemption exists is because it is assumed (though not legally mandated) that a commission-based outside sales position will be a highly compensated position and thus not be at risk of not meeting minimum wage laws in the first place. Employers need to be aware of this and ensure they’re meeting the requirements.

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.