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Overtime Exemption for Inside Sales

June 27, 2001
Related Topics: Wages and Hours, Featured Article

This legislation (H.R.2070) seeks to amend the FairLabor Standards Act to make certain inside sales employees who use the telephone,fax, and computer to make sales from an employer’s establishment exemptfrom the minimum wage, recordkeeping and overtime compensation requirements.Technical provisions of the bill are substantially similar to legislation introducedlast year (H.R. 1302). The following factors are requirements under the proposedlegislation for an inside sales representative to be considered exempt fromthe FLSA overtime, minimum wage and recordkeeping provisions:

  1. the employee has specialized or technical knowledge related to productsor services being sold,

  2. the employee's sales are predominantly to persons or entities to whomthe employee's position has made previous sales, or the position does notinvolve initiating sales contacts,

  3. the employee has a detailed understanding of the needs of those to whomthe employee is selling;

  4. the employee exercises discretion in offering a variety of products andservices,

  5. the employee receives base compensation, determined without regard tothe number of hours worked, of not less than 1.5 times the minimum wagemultiplied by 2,080, and in addition to the employee's base compensation,compensation based upon each sale attributable to the employee,

  6. the employee's aggregate compensation based upon sales attributable tothe employee is not less than 40% of 1.5 times the minimum wage multipliedby 2,080, and

  7. the employee receives a rate of compensation based upon each sale attributableto the employee which is beyond sales required to reach the compensationrequired above, which rate is not less than the rate on which the compensationrequired above is determined.

This legislation was introduced in the House by Rep.Patrick Tiberi (R-OH) on June 6, 2001 as H.R. 2070 and referred to the Educationand the Workforce Committee. The House Education and the Workforce Subcommittee on Workforce Protectionsapproved the bill by an 8-6 vote on June 27. The bill has bipartisan support, led by Rep. RobertAndrews (D-NJ), ranking member of the Education and Workforce Subcommittee onEmployer-Employee Relations, and is expected to be included in the House versionof a minimum wage package.

The proposed legislation is a mixed blessing. Typically,employers welcome amendments to the FLSA, as the statute generally is perceivedas not in line with the modern workforce. Specifically, new technologies havetransformed the roles of many outside salespeople such that today they conductmore and more business on-site and risk losing the current "outside"sales exemption. The proposed exemption for inside sales personnel will encouragemore time spent trying to achieve sales, with a commission pay structure insteadof an overtime pay structure. This could increase sales, which in turn wouldgenerate more employee income via commissions.

From a design and implementation perspective, however,the legislation contains a number of potential problems:

  • Tying the base salary requirement to the minimum wage;

  • The exemption does not allow for any commission threshold;

  • The proposed law excludes salespeople who typically make cold calls. Anyensuing employer policy would need to distinguish between these classesof sales personnel, which it may or may not already do.

  • The proposed law implies that sales incentive compensation plans wouldhave to be uncapped with no decelerator.

  • In the event the new employee isn't at 100% efficiency, you'd have to givethem higher commission rates to account for the difference

  • Saying that sales employees have to be paid for "each sale that isattributable to the employee" sounds as though it removes the potentialto use a bonus-based pay plan.

The bottom line is that it could be a painful pieceof legislation for organizations. There are many companies that have sales incentiveplans for inside sales representatives. Very few of these plans meet the parametersset out in the proposed legislation. In order to take advantage of the exemptoption if the legislation were to be implemented, companies would need to evaluatetheir compensation plans and determine whether they could meet the test foran inside sales exemption while still supporting their business goals.

To learn more

Source: HewittAssociates

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