Overtime For Inside Salespersons in California

For employees whose job duties primarily entail inside-sales, a recent California appellate decision has restricted, but in our opinion, left the door open, for such inside-sales personnel to make an overtime claim against their employers.

According to Labor Code Section 204.1,  commission is defined as “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.”  However, the Court of Appeal in Areso v. Carmax (2011) 195 Cal.App.4th 996, interpreted Section 204.1′s definition of commission in a way that significantly broadened the previous definition of what constitutes commission/wages. As a result of such broadened definition, employees claiming designated as inside-sales personnel have some additional limitations in making claims for, and receiving overtime compensation.

In Areso, Ms. Areso and a class of Carmax inside sales representatives brought a class action lawsuit against Carmax. Those inside sales representatives sold used vehicles, warranty plans, and appraisals. At issue in the matter was Carmax’s pay policy for those inside-sales representatives.  Until 2005, Carmax paid its sales representatives a flat $150 per sold car. Carmax later changed its commission plan to a formula based upon percentages, that ended up paying the sales representatives $154.00 per vehicle. Carmax also paid its sales personnel fixed sums for each warranty sold, each car leased, and other miscellaneous services.

Ms. Areso claimed that Carmax misclassified its inside-sales representatives as exempt from the payment of overtime due to the fact that the fixed rate Carmax paid per vehicle to its inside-sales representatives constituted a “piece rate” rather than a commission. On that basis, Ms. Areso believed she and all similarly situated sales representatives were entitled to (among other things) overtime compensation.

The Court of Appeal previously stated in Keyes Motors, Inc. v. Division of Labor Standards Enforcement, 197 Cal. App. 3d 557, 563 (1987): “Labor Code section 204.1 sets up two requirements, both of which must be met before a compensation scheme is deemed to constitute ‘commission wages.’ First, the employees must be involved principally in selling a product or service . . . . Second, the amount of their compensation must be a percent of the price of the product or service.” The state Supreme Court quoted this definition with approval in Ramirez v. Yosemite Water Co., 20 Cal. 4th 785, 804 (1999).

However, in Areso, the appellate court held that Carmax’s fixed payment per unit sold, did in fact constitute commission. The court decided that a fixed payment per item based upon the amount of items sold, constitutes commission in that each sale causes a commissionable payment.
While we agree with Ms. Areso’s principal argument that her pay was more aptly a “piece rate” rather than commission, the appellate court makes the final determination of that issue. In that regard, the appellate court’s more expansive definition of commission is binding on California employees.

On the other hand, Areso does not address the issue of what it means to be principally selling a product or service. We believe that a large percentage of the alleged inside-sales personnel that auto dealerships employ are more properly characterized as Finance Managers. Finance Managers “primarily” spend their time reviewing sales agreements with customers and spend little actual time selling. As a result, it is our belief that these employees can never be properly classified employees who are exempt from receiving overtime compensation. Just because your employer labels you as inside sales and exempt from overtime because it pays  commission, you may still be eligible for overtime compensation.

If (despite your job title), you perform substantial duties that are primarily not related to selling a product or service, you may still have a claim. For instance, in our experience, most Finance Managers who work at auto dealerships and are paid commission, perform job duties after the sale is already made by the dealershops actual salesperson. The Finance Manager then takes care of the details of the transaction such as contacting DMV for proper paperwork, reviewing the sales agreement with the customer, contacting banks related to customer financing and other post sale(s) activity.  The Finance Manager receives no compensation for that work.  Instead, the Finance Manager receives a small commission on the sale of after- market items such as alarm systems or extended warranties.  The entire sales process for such after-market items typically entails about 10% of the Finance Manager’s overall time spent with the customer.  Our belief is 10% of an employee’s time does not constitute “primary” job duties.  In other industries outside auto dealerships, alleged inside-sales personnel may perform support functions that have little to do with actual sales.

If you are an inside sales representative in any industry and you are being paid on a commission basis, you may still have a claim to overtime compensation. This is true if you work more than 8 hours in a day or more than 40 hours in a week and despite your job title, you are primarily engaged in non-sales related activities.  Also, notwithstanding the appellate court’s decision in Areso, you should still have your employer’s compensation plan reviewed by an attorney. There are other reasons that your employer’s compensation plan may not constitute a commission. For instance, an employer’s commission structure may be invalid due to the fact that it contemplates reductions for items such as employer overhead.  If you are designated as an inside-sales representative and you have concerns about whether you are improperly being denied overtime compensation as an exempt employee, you may contact us and meet with us in one of our conveniently located offices in San Diego, Irvine and San Francisco. We offer a free initial consultation with one of our firm’s experienced employment law partners.

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