California employment law recognizes two types of commissioned employees: (1) outside salespersons (Labor Code § 1171) and (2) inside salespersons (8 Cal.C.Regs. § 11040, 11070). Whether you are an employer or employee, it is important that you familiarize yourself with the basic rules as they are not always clear. 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 costly.
California Law and Regulations
Labor Code § 1171 exempts outside salespersons. See Also Ramirez v. Yosemite Water Co (1999) 20 Cal.4th 785. 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).
An employee is entitled to overtime in California unless the employer can demonstrate that one or more exemptions apply. Labor Code § 1194; 8 C.C.R. §§ 11010-11015. “California law governing wages is remedial in nature and must be liberally construed.” Bureerong v. Uvawas, 922 F.Supp. 1450, 1469 (CD. Cal. 1996). “The wage statutes are not construed within narrow limits of the letter of the law, but rather are to be given liberal effect to promote the general object sought to be accomplished.” Id at 1469-1470.
Selling v. Performing Services –State and Federal Law
During the litigation of the outside salesperson exemption, the main dispute often times revolves around the question whether an employee is really selling or just performing the underlying services. For 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.” This is very similar to the Plaintiff in the Ramirez case who delivered, and sometimes sold, bottled water. 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 fifty percent (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 California quantitative approach, as opposed to a federal qualitative approach.
Job Description Is Not Controlling in California
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.
Away from Employer’s Place of Business
An outside sales employee makes sales at the customer’s place of business, or, if selling door-to-door, at the customer’s home. Outside sales does not include sales made by mail, telephone or the Internet unless such contact is used merely as an adjunct to personal calls. Any fixed site, whether home or office, used by a salesperson as a headquarters or for telephonic solicitation of sales is considered one of the employer’s places of business, even though the employer is not in any formal sense the owner or tenant of the property. See the Department of Labor’s comments on this subject. http://www.dol.gov/whd/overtime/fs17f_outsidesales.pdf
As there are many nuances to what qualifies as outside sales it is best to contact a qualified attorney rather than run the risk of non-compliance.
If you have any questions about the Ramirez case or have similar claims for outside sales issues, unpiad commissions, company charges to your wages, business expenses, off the clock work, or issues with your pay at your current employer, please feel free to contact:
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