California’s Inside, Outside, and Upside Down Sales Exemptions

It may surprise many California employers to learn there is an exception to minimum wage, overtime, and meal/rest requirements for certain salespeople. Yes, you read that correctly. While this may seem “upside down,” for those properly classified as an outside salesperson, the employer doesn’t have to worry about minimum wage and other requirements. Instead, the employee just earns their commission per your agreement. However, it is important to proceed with caution, because this is a very narrow exemption. Moreover, there is a separate category for inside sales subject to their own rules.

So, let’s clear up the sales exemptions:

Outside Sales:

To be properly classified as an “outside salesperson” the employee must be 18 years or older, and customarily and regularly work more than half of their working time away from the employer’s place of business selling items or obtaining orders/contracts for products, services, or use of facilities. (See 8 CCR Section 11010(2)(J).)

The place of business is the employee’s regular place of work. Many employers mess this rule up when they assume the exemption automatically applies to a remote sales worker. That is not the case. For an employee who works from home, their residence would be the place of business. In that case, they would have to spend more than half of their time engaged in selling items or obtaining orders away from their residence—not at home behind a computer screen.

The Labor Commissioner has increased scrutiny on outside salespeople since the rise of the internet and social media. The employee must actually be away from the regular work site at least 51% of the time to meet this exemption. However, for those who do have this arrangement, it can be a huge costs savings for the company!

Inside Sales:

If you have an “inside salesperson” that works at the employer’s place of business (or remotely at home), you may still be able to avoid paying overtime if they satisfy certain requirements. However, these employees must still follow all other requirements for non-exempt employees, including clocking in and out, taking meal and rest breaks, etc. (unless, of course, you can classify the employee as exempt under the administrative, executive, or professional exemptions). As a non-exempt employee, you should always ensure they earning at least minimum wage for all hours worked.

And, while you may pay these employees in commissions, you must still ensure they are being compensated for their rest breaks and any non-productive time, so it is a good idea to establish a base hourly rate for all hours worked, in addition to their commissions.

Here is how the Overtime Exemption Works:

Under Wage Orders 4 (Professional, Technical, Clerical, Mechanical and Similar Occupations) and 7 (Mercantile Industry), inside salespeople are exempt from overtime if they earn at least 1.5 times the California minimum wage (1.5 X $16.00/hour for 2024 = $24/hour) for each hour they work, and at least 50% of their weekly income must come from commissions.

Step 1: In each workweek, the employee must earn more than 1.5 times the minimum wage for all hours worked. This pay may be in the form of wages, salary, commissions, or a guaranteed draw. You cannot count commission earnings from another workweek (i.e., you cannot allocate a large commission payment at the end of the month to previous workweeks in the month). If an inside salesperson has been paid at least 1.5 times the minimum wage for the workweek, proceed to step 2. If not, they are owed overtime.

Step 2: The second part of the test requires that more than half of the employee’s compensation is in the form of commissions (i.e., selling) for each workweek. If the test is satisfied, the employee is not owed overtime. If not, they are owed overtime.

What About Sales Employees who Don’t fit These Definitions?

For example, if you have a sales clerk on staff but they aren’t earning enough in commissions to meet the inside sales exemption, you should start with the assumption that they are treated as any other non-exempt employee. Again, this means they should be clocking in and out, taking meal and rest breaks, and paid overtime. While it is perfectly acceptable to pay them additional commissions per your agreement, remember that commissions affect the employee’s regular rate of pay for calculating overtime!

CEA members can refer to salesperson exemption fact sheet on our HR forms page for additional assistance, or give us a call at 800-399-5331 with your questions. And, remember, any employee earning a commission should execute a signed, written commissions agreement.