Charles S. Plumb and Sam R. Fulkerson, Editors
McAfee & Taft

Vol. 16, No. 8
August 2008

OVERTIME

Outside salesperson exemption under FLSA: new guidance

Do you employ outside salespeople you think are exempt from the overtime premium pay requirement of the Fair Labor Standards Act (FLSA)? Do you think you know how to calculate overtime payments for salaried, nonexempt employees? The Tenth U.S. Circuit Court of Appeals (which covers Oklahoma) just took a fresh look at these FLSA requirements ― and you may have to think again.

Background

Gary Clement and David Gerber were employed by Serco, Inc., as civilian military recruiters. Their jobs required them to work with educational, social, and other organizations to give presentations on the advantages of serving in the U.S. Army and to distribute and display publicity materials to high-school and college students.

When recruits expressed interest, the recruiters set up interviews and administered math and English tests to see if they met the Army's minimum requirements. If they did, the recruiters obtained background checks and other records needed for enlistment and drove the recruits to a U.S. military processing facility. There, the recruits underwent physical exams, were interviewed, and met with guidance counselors, and if all went right, they signed an oath of enlistment. The recruiters then gave the recruits a ride home and met with them regularly to keep them enthused about their decision to enlist. The Army paid Serco every time its recruiting efforts resulted in an enlistment in the Army or Army Reserves.

What is an outside salesperson?

When the recruiters filed a suit for overtime pay, Serco claimed they weren't entitled to premium pay for hours worked in excess of 40 per week because the FLSA provides an exemption from overtime for "outside salesmen." The exemption applies to employees who are regularly away from the employer's place of business making sales or obtaining orders or contracts for services. The court, however, determined that the recruiters didn't satisfy those requirements and therefore didn't fall within the FLSA exemption.

According to the court, the most important thing to consider when deciding if an employee's activity is sales is whether the employee gets a commitment from a buyer. If the employee's efforts are directed toward stimulating the employer's sales generally rather than seeking a specific commitment from a specific buyer, the employee isn't an outside salesperson. The court gave some examples to explain that distinction.

The court noted that the FLSA regulations include the example of a food manufacturer's representative. This type of employee performs many promotional activities, such as putting up displays, removing damaged or out-of-date stock from a grocer's shelves, or rearranging merchandise. But the employee will be considered a salesperson only if he is actually engaged in making particular sales or contracts. If the sales are actually made by someone else, the representative won't fall within the outside salesperson exemption.

Students engaged in door-to-door sales of magazine subscriptions provide another example of work that doesn't fit within the outside salesperson exemption requirements. In a case from 1969, a court held that when the work of student "salespeople" was to determine if a prospect met certain qualifications but did not include collecting money for a subscription, the work wasn't that of an outside salesperson. The students were engaged only in promotional work, paving the way for a sale made by a manager who confirmed the qualifications of the buyer, explained the payment plan, and collected the money.

On the other hand, in a case from 2003, a court held that field representatives for a for-profit technology-based higher education institution did qualify as outside salespeople. These employees were assigned a specific territory and sought recruits through phone calls, high-school visits, and student appointments. They helped the candidates complete their applications and had the authority to obtain a commitment from a prospective student. Because the institution used objective criteria for admission, the field representatives actually made the admission decisions, thus getting a commitment from a buyer and making a sale.

In Serco's case, the court decided that the civilian military recruiters were more like the student magazine subscription representatives than the school field representatives. Both the students and the military recruiters simply paved the way for someone else to make the sale. The court concluded that in the case of the military recruiters, the Army, not the recruiters, made the sale because it was only at the military processing facility, where the recruiters didn't participate, that a recruit could pass the physical, choose a suitable job, and sign the oath to enlist. In the court's opinion, the recruiters just cultivated a list of people who were receptive to the idea of joining the Army.

In light of this case, you should look again at the work of employees you consider to be outside salespeople. Although the FLSA regulations allow exempt salespeople to perform general promotional activities for up to 20 percent of the time they work, to qualify for the outside salesperson exemption, the employee must have the ability to accept orders or contracts on your behalf and must actually do so.

What did Serco owe?

This case didn't end with the clarification of the outside salesperson exemption. The court's decision that the recruiters didn't fall within the exemption meant that according to the FLSA, they were entitled to premium pay for hours worked in excess of 40 per week. The court then had to decide how to calculate the overtime the recruiters were owed.

The recruiters were paid $600 per week. In addition, they received a commission if they met a quota for recruits enlisting and reporting to their assigned training center. The recruiters kept their time and turned in timecards at the end of every pay period. The timecards showed that each of the recruiters worked more than 40 hours in many workweeks. The recruiters argued that they should be paid time and a half for all hours worked in excess of 40 per week.

The court began its analysis with an explanation of the "fluctuating workweek" method of calculating overtime payments. This method of compensation is used when, as the name implies, an employee doesn't work the same number of hours each week. The employee, who isn't exempt from the FLSA overtime requirements, is paid a fixed salary, regardless of the number of hours worked. The salary is thus intended to compensate the employee at the straight time rate for all hours worked, even those hours in excess of 40 per week. Of course, that means you can't dock the employee if she works less than 40 hours in any week. It also means you must use a different method for calculating the premium portion of hours worked in excess of 40 per week.

Since the fluctuating workweek salary compensates the employee for the straight- time portion of hours worked in excess of 40 per week, you only have to make an additional payment of half the regular hourly rate for overtime hours to comply with the FLSA. To calculate the amount of the premium payment, you first divide the salary, plus any other compensation such as commissions, by the total number of hours worked. For example, if your employee's salary is $450 per week, she earns no commissions, and in one week she works 45 hours, her regular rate of pay is $10 per hour. In this example, the employee would be owed an additional $5 per hour for every hour worked in excess of 40.

In its decision, the court confirmed the absolute requirement that a fluctuating workweek compensation scheme requires a "clear mutual understanding" between the employer and the employee about how overtime will be paid. In particular, they must agree that even though the employee's hours will vary from week to week, the base salary won't change. At a minimum, the employee will receive the set, agreed-upon salary.

Although the recruiters argued that they didn't agree to fluctuating workweek compensation, the court found that the evidence showed otherwise. The evidence was that the recruiters understood that they wouldn't be docked when they worked less than 40 hours per week and wouldn't be paid more when they worked over 40 hours. And in fact, the recruiters were never docked. The court acknowledged that there was no understanding about how overtime would be paid but found that wasn't relevant to the recruiter's clear understanding that they were being paid on a salary rather than an hourly basis. The recruiters therefore were entitled to a payment of half their effective hourly rate for all hours worked in excess of 40 per week.

Bottom line

Now, if you think paying your employees half time for hours worked in excess of 40 per week, instead of time and a half for those hours, sounds like a great deal, think again. First, there really must be evidence that there is some fluctuation in the hours your employees work. Then, you need to consider that if you make a change to a fluctuating workweek compensation system, it won't take your employees long to figure out that they are making less money. As you know, that leads to a very unhappy workforce. Finally, determining the half-time rate for employees whose hours change from week to week may become an administrative nightmare. And if you do it wrong, the U.S. Department of Labor may decide that your employees really aren't salaried after all and require you to pay time and a half for the excess hours over the last two years.

The author may be reached at rfowler@dsda.com.

Copyright 2008 M. Lee Smith Publishers LLC

OKLAHOMA EMPLOYMENT LAW LETTER does not attempt to offer solutions to any individual problems or to provide legal advice to its readers. Rather, the OKLAHOMA EMPLOYMENT LAW LETTER seeks to provide information about current developments in Oklahoma employment law. Questions about individual problems or requests for legal advice should be addressed to an employment law attorney of your choice.