Commissioned sales is one of the few areas in which California law is arguably more favorable to employers than the FLSA or laws of other states.  Specifically, California law recognizes an exemption from overtime for sales employees in many industries, provided they are primarily engaged in sales, earn at least one and one half times the minimum wage, and more than half of their income comes from commission earnings. 

Dubbed the “inside sales exemption,” this often-overlooked exception to the obligation to pay overtime applies to sales employees who do not qualify for the outside sales exemption because they work at their employer’s place of business.  In an opinion interpreting the applicability of the exemption broadly, the court of appeal in Muldrow v. Surrex Solutions Corporation confirmed the applicability of the exemption to employment recruiters. 

The recruiters in Muldrow were paid commissions based on both the price paid for the employee placed and the cost to their employer.  Stated simply, they were paid based on profitability of the deal, not just price.  The court clarified that factoring in cost does not destroy the commissioned nature of the pay, and prior cases on the issue (most notably Keyes Motors v. DLSE) did not intend such a restriction.  

In addition, the court rejected Plaintiffs’ argument that activities such as cold calling, interviewing candidates, inputting data, and submitting resumes were not sales related, finding instead that they were essential to accomplishing the sales. 

Finally, the court upheld the plan as a bona fide commission system based on evidence of earnings across the class.  The court found that many employees (unlike the class representatives) were paid in excess of their draws and thus the plan was bona fide.  On that issue, the court observed that limiting focus to any one group of employees would reward the unmotivated or unproductive employee.   

This is a useful case for a number of reasons.  It can be relied on to support a sales-related activity theory in either and inside or an outside sales case.  In addition, it applies a broad definition of “commission” for purposes of such exemption cases.  Finally, in the class action context, it validates the notion that the court must look at the class as a whole in examining the issues, rather than focus on a few (often outlier) class representatives.

by Catherine Dacre