Commissioned (or “inside”) salespersons are exempt from overtime in California. Unsurprisingly, many employers are eager to shoehorn their entire sales forces into the “inside salesperson” exemption. In reality, many employees who think they’re commissioned salespersons are neither commissioned nor salespersons. The “inside salesperson” exemption only applies to an employee if: (1) more than half of his earnings derive from commissions; and (2) his earnings exceed one-and-a-half times the applicable minimum wage. ((IWC Wage Orders 4-2001(3)(D) and 7-2001(3)(D).)) Here’s an inside look at California “inside salesperson” exemption.
I. What’s a “Commission”?
A. The “Persuasion” Test
The first prong of the “inside salesperson” exemption, the commissions test, requires that most of an employee’s earnings come from commissions, i.e., compensation that is: (a) for the sale of property or services; and (b) based proportionately on the amount or price of the property or services. ((Lab. Code §204.1.)) For an employee to be in “sales,” he must persuade a customer to part with his money. ((Muldrow v. Surrex Solutions Corp., 208 Cal.App.4th 1381 (2012).)) For example, a mechanic, who doesn’t persuade customers to let him fix their cars, doesn’t engage in “sales.” Thus, any compensation he earns for fixing a car is a bonus or piece rate, not a commission. ((Keyes Motors, Inc. v. DLSE, 197 Cal.App.3d 557 (1987).))
Even some employees who do nothing but persuade customers to buy property or services aren’t “inside salespersons.” The exemption applies only to employees who fall into two categories of occupations: (1) professional, technical, clerical, mechanical, and similar occupations; and (2) mercantile occupations. In other words, a McDonald’s cashier might influence customers to buy the restaurant’s “property or services” by asking if they “would like fries with that,” but because he isn’t in either of those two occupational categories, the “inside salesperson” exemption doesn’t apply to him.
B. The “Proportionality” Test
But just because all employees who earn commissions are salespersons doesn’t mean all salespersons earn commissions. In Harris v. Investor’s Business Daily, Inc., 138 Cal.App.4th 28 (2006), the employees, telemarketers for Direct Marketing Specialists, Inc. (DMSI), sold customers subscriptions to Investor’s Business Daily (IBD). The employees received a certain number of points for selling certain types of subscriptions (e.g., 0.25 points for a 13-week subscription). The value of those points rose as the employees earned more points (e.g., $15.80 per point for the first 9.99 points, $22.30 per point for the next 10 to 16.99 points, etc.)
The employees sued DMSI and IBD for, among other things, non-payment of overtime. In response, DMSI and IBD argued the employees were inside salespersons and therefore exempt from overtime. The Court of Appeal disagreed and noted the point values were not proportionate to the subscription prices. For example, the point values for selling a six-month subscription could be higher than the point values for selling a one-year subscription if the former was worth more “points” than the latter. The Court thus held that the point values, having nothing to do with subscription prices, couldn’t be commissions.
II. How Much Does an Inside Salesperson Have to Earn to Be Exempt?
The second prong of the “inside salesperson” exemption, the “minimum earnings” test, sounds straightforward: the exemption doesn’t apply to an employee if his earnings don’t exceed one-and-a-half times the minimum wage. But the statewide minimum wage, $10 per hour, is only a floor, not a ceiling, and the ceiling can vary from city to city. For example, L.A., San Diego, and various Bay Area cities all have a super-minimum wage. In other words, an employee who earns over $15 (i.e., over one-and-a-half times the statewide minimum wage) and derives more than half of his income from commissions can still be nonexempt.
Even if an employee earns more than one-and-a-half times the minimum wage, he’s only exempt in those pay periods in which his employer “actually pays” him such. ((Peabody v. Time Warner Cable, Inc., 59 Cal.4th 662 (2014).)) Thus, the fact that an employee might have averaged a lot more than $15 per hour during a given month is unimportant. Moreover, Labor Code section 204(a) required an employer to pay an employee all earned wages, including commissions, at least semimonthly. For an employer to attribute a commission from one pay period to an earlier pay period would mean that it has effectively established a monthly pay period in violation of Section 204(a). ((Id.))
