Employers often are warned about the significant dangers associated with misclassifying workers for purposes of avoiding overtime under the "white collar" exemptions, such as the administrative, executive and professional exemptions. There is, however, another exemption to the requirement to pay overtime that frequently leads to misclassification under the Fair Labor Standards Act (FLSA) - the outside sales exemption (a/k/a §13(a)(1) exemption).
Many employers simply misunderstand the scope of this FLSA exemption and operate under the mistaken impression that they can pay their entire sales force a salary and avoid all overtime obligations. Initially, it is worth noting that the outside sales exemption to the normal requirement to pay overtime does not have a salary requirement. Rather, employees may be paid entirely on a commission basis. Employers still, however, must ensure that other criteria are satisfied in classifying an employee under the FLSA's outside sales exemption.
Specifically, aside from the employee having a primary duty of making sales, the Department of Labor has emphasized that an employee classified under this exemption must be "customarily and regularly engaged away from the employer’s place of business in making sales." 29 C.F.R. 541.500(a).
In addressing the "engaged away" prong of this test, the courts and the United States Department of Labor emphasize that an employer must demonstrate that the employee spends approximately 80% of his time away from the employer's place of business engaged in sales activities. In other words, to be a legitimate "outside sales" employee, an employee cannot simply make sales calls from inside an office (even a home office). Rather, an employee must spend most of his or her time traveling and meeting with customers/potential customers outside of the office. Further, the time spent in the office must focus on duties "incidental" to the employee’s outside sales activities, such as writing sales reports, planning itineraries and attending sales meetings.
In light of these requirements to avoid the obligation to pay overtime for all hours worked over forty in a week, any employers who classify an employee under the outside sales exemption should promptly evaluate the percentage of time an employee spends selling outside the office. If it is less than 80%, the employer should either revisit the employee's job duties to bring the person in line with the exemption or seriously assess whether to switch the employee to a non-exempt status.