California and federal law each exempt from various wage and hour laws employees who sell goods and services outside the employer’s place of business. California employers must comply with both laws, generally by applying the one that is more generous to employees. Recently, in Christopher v. SmithKline Beecham Corporation, the United States Supreme Court addressed the federal outside sales exemption. The decision may influence how courts and agencies apply the exemption under California law as well.

Outside Sales Exemptions under State and Federal Law

California wage and hour laws are contained in certain sections of the Labor Code and in wage orders promulgated by the California Industrial Welfare Commission. The Fair Labor and Standards Act (“FLSA”) and U.S. Department of Labor regulations are the federal analog. Both cover minimum wage pay, overtime compensation, and other wage issues, with California addressing a broader variety of standards.

Federal and California law also include various types of “exemptions” from minimum wage and overtime law. One such exemption applies to “outside salespersons.” Under California law, the outside sales exemption applies to any adult employee “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.” For an employee to qualify for the outside sales exemption under federal law, his or her primary duty must be to “make sales” or to “obtain orders or contracts for services or for the use of facilities.” Furthermore, he or she must be “customarily and regularly engaged away from the employer’s place of business.”

The California and federal outside sales exemptions are similar in that they apply to employees who sell products and services at a customer’s business or home. However, there are some key differences between the state and federal exemptions.

The California outside sales exemption requires that an employee must spend more than 50 percent of his or her working time making sales. The FLSA requires that making sales be an employee’s “primary duty.” “Primary duty” is defined under the FLSA regulation as “the principal, main, major or most important duty the employee performs.” It is not necessarily dependent on whether the employee spends the majority of his or her time on the task.

Under the FLSA, incidental work that “furthers the employee’s sales efforts” is considered exempt work. Under California law, however, incidental tasks that do not involve actual “selling” do not count toward an employee’s time spent making sales.

Finally, and relevant to the Supreme Court’s decision in Christopher, the California wage orders do not define “sales.” Under the FLSA, “sale” or “sell” “includes any sale, exchange, contract to sell, consignment for sales, shipment for sale, or other disposition.”

Christopher v. SmithKline Beecham

In Christopher v. SmithKline Beecham, the United States Supreme Court addressed the federal outside sales exemption as it applies to pharmaceutical sales representatives (“PSRs”). Michael Christopher and Frank Buchanan worked as PSRs for SmithKline. They were responsible for contacting physicians in an assigned sales territory to discuss the features, benefits, and risks of certain SmithKline prescription drugs. Their primary objective was to obtain a nonbinding commitment from the physician to prescribe SmithKline drugs in appropriate situations. SmithKline classified its PSRs as exempt under the FLSA outside sales exemption.

Christopher and Buchanan filed a lawsuit against SmithKline for unpaid overtime wages in the United States District Court for the District of Arizona. The district court granted summary judgment for SmithKline, holding that Christopher and Buchanan were exempt under the federal outside sales exemption. The Ninth Circuit Court of Appeals affirmed, creating a split with the Second Circuit in another case involving pharmaceutical sales representatives.

The Supreme Court stepped in to resolve the conflict. Christopher and Buchanan argued that physicians did not purchase prescription drugs from them, so the exemption did not apply because they were not actually “selling” the drugs to the doctors. The Court disagreed and reasoned that “[o]btaining a nonbinding commitment from a physician to prescribe one of [SmithKline’s] drugs is the most that petitioners were able to do to ensure the eventual disposition of the products that [SmithKline] sells.” The Court further reasoned that “[t]his kind of arrangement . . . comfortably falls within the catch-all category of ‘other disposition'” set forth in the FLSA definition of “sale.” Significantly, the Court rejected the U.S. Department of Labor’s argument that a “sale” must include a transfer of title to a particular product.

Effect of Christopher on Federal and State Outside Sales Exemptions

The Court’s broad interpretation of “sale” in Christopher may open the door to employers seeking to classify as exempt outside salespersons other employees engaged in non-traditional salesmanship. Of course, whether and to what extent California courts will rely on the decision remains to be seen. When California wage law is not specific, courts often interpret the law in accordance with the FLSA. However, the California Supreme Court in Ramirez v. Yosemite Water Company interpreted the California outside sales exemption in another context, but did not follow the federal law.

Tips for Employers

California employers looking to take advantage of the outside sales exemption should take several steps to ensure that they are properly classifying their employees. Employers should confirm that most of their sales employees’ time is spent out of the employee’s office or home. The employees also must spend more than 50% of their time selling as opposed to engaging in work unrelated to sales. Employers also should draft job descriptions outlining their employees’ duties, and ensure that their employees understand the expectations set forth in the job descriptions.