How to Properly pay an "Inside Sales" team

There are two types of classifications when it comes to sales team members. Inside sales and outside sales. This brief analysis focuses on inside sales classifications and how they are affected by federal and state law.  An inside sales person is defined as a person who sells the product of the company, whether it is a physical product or a service.  For almost all applications your sales team would be considered an "Inside Sales" team; therefore, this article will focus only on the inside sales structure.

Many of our clients have set up their sales team as Independant Contractors (ICs) and then used a 100% commission structure.  This makes some logical sense, as the company need not control their hours or how they go about making their sales calls.  The only issue with this is that it is simply not allowed under the current interpretation of the wage and hour rules in virtually every state!

What this means is that an inside salesperson must be an employee and also must be paid overtime.  However, there is one big exception and that is if the employer can set up a system for tracking hours and a commission structure that complies with the rules that allow inside salespeople to be classified as exempt. Exempt meaning exempt from overtime pay requirements under FLSA section (7i). 

The preferred method to achieve this, in our opinion, is to establish a base rate of pay and be able to show, in a look back, that the salesperson’s income is comprised of more than 50% commission. The easiest method for establishing this is to use a base rate of pay vs. commission, whichever is greater, pay structure. 

The regulation for making an inside salesperson exempt are addressed in detail under Fact sheet #20 

https://www.dol.gov/agencies/whd/fact-sheets/20-flsa-commissions-retail

For further education- This article from the national law review highlights a change within the structure of how the inside sales exemption can be applied and which industries qualify for it. 

Until 2020, there were two lists, One was inclusive, and the other excluded some ninety industries.

These lists have been laid to rest and are no longer applicable,  which has been interpreted as a positive development for employers.

https://www.natlawreview.com/article/dol-withdraws-flsa-inside-sales-exemption-lists

Following are some highlights From Fact Sheet #20.

Characteristics

Retail and service establishments are defined as establishments 75% of whose annual dollar volume of sales of goods or services (or of both) is not for resale and is recognized as retail sales or services in the particular industry. This means that most business, even things like dental offices and consulting firms, would be considered retail.

Requirements

If a retail or service employer elects to use the Section 7(i) overtime exemption for commissioned employees, three conditions must be met:

1. the employee must be employed by a retail or service establishment, and
2. the employee's regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked, and
3. more than half the employee's total earnings in a representative period must consist of commissions.

Unless all three conditions are met, the Section 7(i) exemption is not applicable, and overtime premium pay must be paid for all hours worked over 40 in a workweek at time and one-half the regular pay rate.

Further essential considerations regarding remote employees working in multiple jurisdictions.

A few states have created their own additional rules regarding the inside sales exemption and or have laws that apply to exempt employees, which we believe must be considered. 

An example would be Massachusetts, where there is no equivalent of the inside sales exemption. However,  existing exempt vs. non-exempt law in Mass seems to preclude the ability to use the federal standard for gaining the inside sales exemption.

Proof of your eligibility for inside sales exemptions is ongoing.

The federal statute for qualifying includes requiring that the employee’s pay be driven by 50% or more from commissions. 

An additional requirement is that the employer must confirm that at a given time, during a look-back period, the employee is making at least 1.5 times the minimum wage. With this in mind, employers must have employees clock all time. We recommend that you use a one-month look back.

The bottom line is that in almost every circumstance, your sales team needs to be classified as Employees and not as Independant Contractors, and if you want to remove the overtime component you must follow the guidelines set for above.  This is complicated and you should not attempt to solve this alone.  We recommend that you get expert guidance when setting up a pay structure for your sales team.

This information comes from our sister company CEDR Solutions which can be reached at https://www.cedrsolutions.com/ or [phone].