This month we cap off our series by discussing the Outside Sales and Highly Compensated Exemptions. These are lesser-known exempt statuses for a couple of reasons. One reason is few individuals qualify for the Outside Sales Exemption. The second reason is Highly Compensated Employee Exemption is new since the 2004 regulation changes.
To qualify for the Outside Sales Exemption:
1. The employee’s primary duty must be making sales or obtaining orders.
2. The employee must be customarily and regularly engaged away from the employer’s place(s) of business.
SALARY BASIS EXCEPTION: Outside sales employees need not be paid on a salary or fee basis. And no minimum wage is required. They are not eligible for the Highly Compensated Exemption available to administrative, executive, and professional employees.
WORDS TO THE WISE: Outside sales employees are rarely seen in the office, except perhaps the annual holiday party. They spend most of their time at customers’ places of business or, if selling door-to-door, at customers’ homes making and following up on sales. Work in the office incidental to and in conjunction with their outside sales, including incidental deliveries and collections, is considered exempt, as is other work that furthers the employee’s sales efforts, including writing sales reports, updating or revising sales or display catalogs, planning itineraries, and attending sales conferences.
WORDS TO THE WISE: Outside sales work does not include sales by mail, phone, or Internet unless such contact is merely an adjunct to personal calls. Employees who use a fixed site, whether home or office, as a headquarters or for telephonic solicitation of sales are inside—not outside—sales employees and non-exempt. Drivers who deliver and sell products may qualify as outside sales employees if their primary duty is making sales.
To qualify as a Highly Compensated Employee, an employee must:
1. Be paid a total annual compensation of $100,000 or more including commissions and non-discretionary bonuses.
2. Perform office or non-manual work.
3. Regularly perform one or more of the exempt duties in the tests for the executive, administrative, or professional exemptions.
SALARY BASIS EXCEPTION: “Total annual compensation” must include at least $455 per week paid on a salary or fee basis, but may also include commissions, nondiscretionary bonuses, and other nondiscretionary compensation, but not board, lodging, and other facilities, or payments for medical or life insurance, contributions to retirement plans, or the cost of other fringe benefits.
WORDS TO THE WISE: If an employee’s total annual compensation does not total $100,000 by the last pay period of the 52-week period, the employer may, during the last pay period or within one month after the end of the 52-week period, make one final payment sufficient to achieve the required level. For example, an employee earns $80,000 in base salary, and the employer anticipates he or she also will earn $20,000 in commissions. However, due to poor sales, the employee only earns $10,000 in commissions. The employer may pay the employee $10,000 within one month after the end of the year to satisfy the exemption.
WORDS TO THE WISE: An employee who does not work a full year may qualify if the employee receives a pro rata portion of $100,000 based upon the number of weeks the employee will be or has been employed. The employer may use any 52-week period as the year, such as a calendar year, a fiscal year, or an anniversary of hire year. If the employer does not identify some other year period in advance, the calendar year will apply.
WORDS TO THE WISE: A high level of compensation is a strong indicator of an employee’s exempt status, eliminating the need for a detailed analysis of the employee’s job duties. Thus, a highly compensated employee will qualify for exemption if the employee customarily and regularly performs any one or more of the duties of an executive, administrative, or professional employee. For example, an employee may qualify as a highly compensated employee, if he or she customarily and regularly directs the work of two or more employees, even though the employee does not meet all of the other requirements for the executive exemption.
We know that properly classifying employees is not easy. Contact MSEC with your questions about exempt classifications.