There are state and federal law provisions that exempt certain employees from laws requiring overtime pay. The various exemptions apply only to those workers who meet the exemptions’ particular criteria. These criteria may differ under state and federal law. As a result, an employee may be entitled to overtime under federal law, even if his job qualifies for an exemption under state law (and vice versa).

California’s wage and hour laws are usually stricter than federal law, making it more difficult for employers to take advantage of these exemptions. However, the “inside salesperson” exemption is an exception to this general rule. A California court recently applied the inside salesperson exemption to a group of employees, with interesting results.

The Inside Salesperson Exemption

A salesperson who earns more than one and one-half times the minimum wage, and whose income is more than 50% derived from commissions, may be deemed “exempt” under federal and California law. However, there are some caveats.

This exemption is contained in only two of the Industrial Welfare Commission Wage Orders applicable to California employers: Industry Wage Order 7-2001, which covers the mercantile industry (e.g., retailers), and occupation Wage Order 4-2001, which applies to employees in professional, technical, clerical, mechanical, or similar occupations, provided they are not covered by another “industry” wage order.

The federal Fair Labor Standards Act (FLSA) has a similar exemption. However, the federal exemption applies exclusively to “retail and service establishments.” If a business does not qualify as a “retail and service establishment,” the federal exemption does not apply regardless of the sales person’s compensation.

Muldrow v. Surrex Solutions

In Muldrow v. Surrex Solutions, the plaintiffs were “senior consulting services managers,” or recruiters. They spent most of their time trying to match potential job candidates with clients, by performing tasks such as locating and interviewing candidates, inputting data about them into computer systems, and submitting resumes to clients for review. When they placed a candidate, they were paid either a direct percentage of the placement fee, or in some cases, a formula that took into account the amount the client was billed for and the placement’s expenses.

The plaintiffs filed a class action lawsuit claiming violation of California’s overtime and meal and rest period rules. But a California court of appeal rejected their claim, determining they were exempt, inside salespeople. The court reasoned that they offered a candidate to a client in exchange for money, and their other duties were related to that task, so they were “selling.” Also, even though their pay was not a fixed percentage of profits, it was a commission within the definition of Wage Order 7, because nothing in the law required a commission to be a simple fixed percentage. As a result, the employees were not entitled to overtime.

Finally, applying the recent California Supreme Court case Brinker v. Superior Court, the court determined that the employer met its obligation to “provide” the employees with meal periods, and was not required to ensure the employees actually took the meal periods.

The FLSA Exemption

In determining that the plaintiffs were inside salespeople under California law, the Muldrow court did not address which Wage Order applied to the employer, although it quoted from Wage Order 7. Also it did not address whether the employer was a “retail or service establishment,” as the federal inside salesperson exemption mandates.

There are federal regulations interpreting the definition of “retail or service establishment.” It generally requires a “retail concept.” Office environments such as the employment agency in Muldrow do not qualify as retail establishments. So, although not decided by the Court of Appeal, the Muldrow plaintiffs may not qualify for the federal inside salesperson exemption. If the federal exemption does not apply, then the plaintiffs may be entitled to overtime under federal law for work performed in excess of 40 hours per week, even though California’s overtime provisions might not apply.

What the Case Means for Employers

Employers must carefully evaluate the applicability of both state and federal exemptions when deciding how to classify its workers under wage and hour laws. Although most employees who are exempt from state wage and hours laws will also be exempt from federal counterparts, the Muldrow case demonstrates the applicable rules sometimes differ.

When state and federal law differ, the employer must apply the law more protective of the employee. For example, inside salespeople exempt from state law but not federal law must be paid weekly overtime (but not daily overtime, because federal law does not require payment of daily overtime).

Employers should also understand the effect of a given “exemption.” For example, the insides salesperson exemption exempts employers only from paying overtime. The exemption does not relieve employers from complying with other wage and hour laws, like providing meal and rest periods and keeping accurate time records.

Finally, when employers are unsure which laws apply, they should speak with employment counsel before attempting to take advantage of any exemption. Because the laws regarding exemptions are narrowly construed and violating the laws can be costly, employers must be careful when navigating this complex area of the law.