The Department of Labor’s (DOL’s) Wage and Hour Division recently issued three new opinion letters addressing the Fair Labor Standards Act’s (FLSA’s) sales exemptions. Two letters address the outside sales exemption, and the third addresses the retail or service establishment exemption.
FLSA2020-6: Do salespeople who travel to different locations to sell their employers’ products using their employers’ mobile assets qualify for the outside sales exemption?
The first opinion letter, FLSA2020-6, addresses whether salespeople who use “stylized” trucks to travel to high-population areas and events to sell products fall within the outside sales exemption of the FLSA.
Ordinarily, a position will qualify for the exemption only if (a) the employee’s primary duty is “making sales” to or “obtaining orders or contracts for services” from customers; and (b) the employee is “customarily and regularly engaged” in performing duties “away from the employer’s place or places of business.” 29 C.F.R. sections 541.500(a), 541.501, 541.502. The exemption includes not only sales work itself, but also “work performed incidental to and in conjunction with the employee’s own outside sales or solicitations.” 29 C.F.R. section 541.500(b).
In FLSA2020-6, the DOL concluded that the employees satisfy both requirements and are therefore exempt.
The DOL determined that such salespersons qualify for the outside sales exemption despite the fact that a material portion of their work involved non-sales activity concerning preparation and deployment of the employers’ sales trucks. Specifically, the DOL found that the exemption applied because the salespersons’ primary duty was selling products and service contracts (i.e., “making sales”), and because they spent 80 percent of their time on sales deployments away from the employer’s business location. Only 20 percent of their time was spent in activities directed toward furthering their sales efforts, such as deciding when and where to deploy the truck and what merchandise to stock. Additionally, the DOL emphasized that the employees had other indicia of being outside sales employees, including the “hallmark” of commission-based compensation, the receipt of sales training, and a lack of in-field supervision. This new guidance provides further confirmation of the highly fact-intensive nature of the outside sales exemption. Importantly, FLSA2020-6 provides no “bright line” guidance. As a result, employers seeking to apply FLSA2020-6 should be cautious to walk through a comprehensive assessment of all of the exemption elements and indicia identified by the DOL.
FLSA2020-8: Do salespeople who set up displays and perform demonstrations at non-employer retail locations qualify for the outside sales exemption?
The second letter, FLSA2020-8, deals with salespeople who set up displays and perform demonstrations at retail operations (not owned, operated, or controlled by their employer) such as home and garden shows, trade shows, state and county fairs, and big-box stores. The salespeople spend no more than 21 days per month (and usually 10 days on average) at a given show or retail operation, and otherwise have their “headquarters” at their home offices. At home and garden shows, trade shows, state and county fairs, and similar events, customers buy from the salespeople directly. At the big-box stores, customers make purchases through the retailer, which passes a portion of the sales to the salespersons’ employer.
The DOL concluded that the salespeople at shows and locations other than big-box stores qualify for the outside sales exemption because they spend over 80 percent of their workweek making sales directly to customers, and are paid commissions and bonuses based on those purchases.
In contrast, the DOL explained that the outside sales exemption may not apply to the salespeople working at big-box stores, because customers at those locations purchase products through the store, not the salesperson. Under the FLSA’s regulations, an employee “makes sales” if they “obtain a commitment to buy” from a customer and are credited with the sale. If the salespeople at big-box stores do not obtain a commitment from the customer to buy the employer’s products and are not given credit for those sales, then they are likely only engaged in non-exempt general promotional work. However, if the salespeople obtain commitments from customers and are credited for the sales generated from their efforts, they are performing exempt work, and are more likely to be eligible for the exemption.
FLSA2020-8 serves, yet again, as an important warning to employers. Two employees engaged in very similar activity may have differing exemption status based on the legal entity making the final sale in a given transaction. Once again, this determination is exceptionally fact intensive and raises concerns about employees who may work in both a trade show and big box retailer environment as a part of a single job.
FLSA2020-10: Does the retail or service establishment exemption apply where more than half of an employee’s earnings during a representative period do not consist of commissions?
The third letter, FLSA2020-10, discusses the application of the retail or service establishment exemption to sales employees of a small home furnishings retailer.
Under existing law, the retail or service establishment exemption applies if (a) the employee is employed by a retail or service establishment; (b) the employee’s regular rate of pay exceeds one and one-half times the minimum hourly rate; and (c) more than half of the employee’s compensation for a representative period (not less than one month) consists of commissions on goods or services. 29 U.S.C. section 207(i); 29 C.F.R. section 779.412.
FLSA2020-10 primarily addresses the applicability of the exemption in two scenarios: (1) the opening of a new store where the sales volume is unknown; and (2) the hiring of a new salesperson with no sales-performance record. In these situations, the employer cannot determine whether more than half of the new employees’ compensation by the end of the “representative period” (at least one month) will consist of sales commissions. Thus, it is unclear if the employer can utilize the exemption prior to the completion of a representative period.
As an initial matter, the DOL noted that “this scenario is not explicitly addressed in the regulations[.]” Relying on a 1981 DOL opinion letter, the DOL explained that an employer may use the retail and service establishment exemption “simultaneously with the commencement of the representative period.” However, if, at the end of the initial representative period, the employee’s commissions do not constitute more than half of their compensation, the employer must pay for any overtime hours worked during that period. After the initial representative period, the employer can again attempt to establish a representative period going forward and claim the exemption as long as the requirements are satisfied.
This conclusion creates added challenges for employers. At new locations and with new hires, employers seeking this exemption likely will be required to track time as if their employees were non-exempt. If the employers fail to do so, they may be unable to make their employees whole as required by FLSA2020-10.
These opinion letters provide valuable guidance as to the application of the outside sales and retail or service establishment exemptions. Specifically, employers with workers who may qualify for these exemptions should keep the following general principles in mind:
- Application of the outside sales exemption may vary based on any number of discrete factual details. In the extreme, sales people with the same job title for the same company stationed at different locations may not have the same exemption status.
- Even if a sales employee makes sales out of a “fixed” location for a limited period of time (g., a two-week trade show), the outside exemption may apply so long as the location is not the employer’s place of business or the employee’s “headquarters,” such as a home office.
- If sales cannot be tracked to the employee’s efforts, or customers do not make direct commitments to the employee to make a purchase, the employee may be engaged in non-exempt general promotional activity rather than sales activity.
- Employers may use the retail or service establishment exemption simultaneously with the commencement of a representative period (e., for a newly-hired employee), but must make sure to track the employee’s commissions (if any) and hours, and pay the employee for overtime worked during the representative period if more than half of the compensation ultimately does not come from commissions.
These issues are complex and challenging. If you need any assistance reviewing your application of these exemptions, please do not hesitate to contact your Reed Smith labor and employment counsel.