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Are Salesmen Due Overtime Pay?

written by: •edited by: Michele McDonough•updated: 7/30/2010

If you work in the sales industry or employ commissioned employees, are salesmen due overtime pay and if so, under what circumstances? This issue is extremely important of late, especially since so many disgruntled employees are filing lawsuits and winning.

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    Why You Need to Know Overtime & Wage Laws

    US Wage and Hour Division Overtime laws and rules are plaguing some organizations that employ either salesmen or commission based employees. Pharmaceutical giant Novartis AG lost in its endeavor to not pay sales representatives who visit doctor’s offices and must now pay approximately 2,500 current and former employees from March of 2000 through April of 2007 tons of overtime pay. And they’re not alone! Companies like Home Depot, Wal-Mart and Starbucks are also awaiting court decisions filed by some employees who want answers to the question, “Are salesmen due overtime pay?"

    To keep it even more confusing, 18 states have their own wage and hour laws that trump the Federal Labor Standards Act (FLSA) that was revised in 2004, including California and Illinois. The Wage and Hour Division of the federal Department of Labor, offers a map that shows which states have their own laws.

    You can throw out what your employee handbook says if you aren’t following salesmen overtime pay laws in your state or if you don’t comply with rules set by the FLSA, because if you’re taken to court and you aren’t following the laws for overtime in your state, you will lose.

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    How to Be Compliant

    128px-Vraagteken svg As an employer myself who does employ commissioned sales employees, I suggest your first move is to call your local Department of Labor and make an appointment. Take along the rules you’ve outlined for salesman overtime pay and have them review it with you to ensure you are compliant. Why is this your best bet? The new FLSA act is over 13,000 pages long and unless you can totally understand all the legal mumbo jumbo inside the FLSA act or whatever is included in your state’s wage and hour laws, you can get lost when determining overtime pay—and fast.

    My state, New Mexico, does follow the FLSA act and doesn’t have its own rules that trump this act. When considering are salesmen due overtime pay, this is how it works in my state:

    Salesman Joe works a five-day week from 8:00 AM to 6:00 PM and is a commission based employee. He receives commissions based on the gross sales profit from each vehicle he sells at my Ford dealership. He is not eligible for overtime pay in New Mexico because:

    • He is an in-house salesperson (not placed in the outside sales category).
    • He is paid a draw from expected commissions on the 10th of each month.
    • He is paid all commission due on the 25th of each month, less the draw received on the 10th of the month.
    • If salesman Joe has sold no cars the previous month and his draw received is less than minimum wage, my company must compute the hours he worked and pay him the standard minimum wage due of $7.25 per hour, but not overtime.

      In New Mexico, however, outside or traveling salesmen, may be eligible for overtime based on whether they are exempt or non-exempt employees and here’s where it gets tricky, hence the need for you to visit your local Department of Labor.

      Another factor in the new FLSA act of 2004 states that any employee, regardless of exempt or non-exempt status must receive overtime pay if they make less than $23,660 annually. If their commission exceeds $100,000 annually, overtime pay is waived. As revealed in a story by the Washington Post, “It’s all the other employees that fall within these wage limits that become confusing for the employer who pays commissions."

      Please click on Page 2 to learn about exempt vs non-exempt sales staff, how to create a sales contract, and why ignorance of the FLSA Act is not a defense in a court of law.

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      Need to know if the answer to the question, are salesmen due overtime pay? First you need to understand the laws in your state along with federal laws including how to determine if your sales staff qualfiy as exempt or non-exempt employees. Learn how to create legal and solid sales commission contracts and remember, ignorance of wage and hour laws is not a defense that will hold up in a court of law.
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      Exempt Vs. Non-Exempt Sales Staff

      690px-Supermarket employees clearing up shopping carts Non-exempt employees are eligible for overtime pay and exempt employees are not. So how do you determine if a salesman is exempt or non-exempt? The FLSA has qualifiers such as job duties and types of professions or professional certifications. Exempt jobs include professional services such as doctors, lawyers, and accountants, but can also include the professional salesman, if he is certified by an automaker (or other organization) by required training and successful completion of required courses.

      If a salesman is just your brother-in-law that works for you with no training, he may not be considered exempt and thereby, due overtime pay, depending upon what laws your state follows. Further, some states say overtime kicks in after 8 hours of work, where other says it kicks in after a 40 hour workweek, just to make it even more confusing.

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      Create a Sales Commission Contract

      When considering paying employees on commission, first consider whether you have exempt or non-exempt sales people and write two commission contracts. Keep in mind, that in most states, off-site sales people are required to receive overtime pay where onsite sales people are not.

      First, read my articles on Paying Employees on Commission and How to Define Your Sales Commission Plan, as well as Sales Commission and Compensation Plan Templates that offers free commission templates to guide you in writing your sales commission contracts.

      Most courts will abide by the rules listed in your contract if:

      1. They follow state or federal guidelines.
      2. Salesmen at the end of each pay period have indeed made at least minimum wage.
      3. The commission based employee agrees to the terms of the contract.
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      Ignorance of Labor Laws Is Not a Defense

      400px-Crossed Gavels svg I can’t stress enough how important it is to not purchase those “all-inclusive" guides to how to pay your sales employees. Even if they claim their materials contain all the information for each and every state, they are not updated as often as they should be and can be expensive to purchase.

      Instead, to ensure you’re not dragged into a dispute with a current or former employee and have the Department of Labor knocking at your door, take the time to visit with them and because they are a free government organization funded through the taxes we pay, let them help you write your commission rules; their knowledge is bar none and will hold up in court.

      Often, employers think the old rules of the FLSA act (way back from the 1970s) still apply and have never revisited or read up on the new version of the FLSA passed in 2004 and ignorance of the law is not a defense in the eyes of the Wage and Hour Division or a court of law.

      If you’ve just started a business and are paying out sales commissions and wonder are salesmen due overtime pay, stay on the safe side and do pay them overtime for any hours worked in a 40 hour pay period until you have the time to develop your plan and commission contracts. Pay the overtime on top of earned commissions to ensure you are abiding by general laws until you can obtain help on creating a commission plan that will be legal for your commissioned based employees.

      While all of this sounds scary and you may want to immediately scramble for those timecards to see who is due overtime pay, instead, find out the laws, stay in compliance, and either pay the overtime a salesman is due or revise your employee handbook and commission contracts and have each commissioned based employee sign an acknowledgement page saying they have received the revised changes. A signature and acknowledgement from a commission employee is often looked at by courts and labor divisions as an agreement or contract and is hard to dispute.

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      References

      1. California Employment Lawyers Blog (7/10/10) (http://www.californiaemploymentlawyersblog.com/2010/07/us-appeals-court-rules-novartis-salespeople-covered-by-flsa-overtime-law.html)
      2. Washington Post (8/222/004/Page A08) http://www.washingtonpost.com/wp-dyn/articles/A21925-2004Aug21.html

      Image Credits:

      • US Wage & Hour Division Log (http://commons.wikimedia.org/wiki/File:WHD.png)
      • Red Question Mark (http://commons.wikimedia.org/wiki/File:Vraagteken.svg)
      • Supermarket Employees (http://commons.wikimedia.org/wiki/File:Supermarket_employees_clearing_up_shopping_carts.jpg)
      • Crossed Gavels (http://commons.wikimedia.org/wiki/File:Crossed_Gavels.svg)