Inside Sales Exemption: what are the rules?


Many companies pay their inside sales people a base wage or salary and then pay commissions.  Do these people get overtime pay, too?

Yes, especially in Connecticut.

As usually, we start with the understanding that everyone gets overtime pay and an employer who wants to avoid it must prove that an exemption applies.

There is an exemption for inside sales.  It is quite complex and there are some good sources of information out there.  The US DOL Fact Sheet does a good job explaining the federal exemption.

In Connecticut, the “inside sales” is much stricter and more employee friendly.  This exemption permits an employer to avoid overtime pay to inside sales persons for whom the following is true:

a.     Their sole duty must be to sell a product or service,
b.    Their total weekly pay must be greater than twice the minimum wage for all hours worked,
c.    More than half their pay must be commissions
d.    They must now work more than 54 hours per week.

(the precise language of the law is below)

Connecticut General Statutes Sec. 31-76i (g) any inside salesperson whose sole duty is to sell a product or service (1) whose regular rate of pay is in excess of two times the minimum hourly rate applicable to him under section 31- 58, (2) more than half of whose compensation for a representative period, being not less than one month, represents commissions on goods or services, and (3) who does not work more than fifty-four hours during a work week of seven consecutive calendar days. In determining the proportion of compensation representing commissions, all earnings resulting from the application of a bona fide commission rate shall be deemed commissions on goods or services without regard to whether the computed commissions exceed the draw or guarantee;..

In Connecticut, this law is often violated when someone is given duties other than sales, for example, management work.

The overtime that is paid must include the commissions and not be based simply on the hourly rate.  So, if your hourly rate is $10 and you earned $500 in commissions in a week in which you worked 50 hours, your overtime rate for your ten hours of overtime shouldn’t be just $15 (one and a half times your hourly rate) but should be one and half times $20 (since the $500 divided by 50 hours adds $10 to your base rate).

Massachusetts Family Dollar Store Managers allowed to Sue for Overtime Wages in State Court.


A federal judge ruled recently that a class action against Family Dollar Stores by its Massachusetts Store Managers can return to the Massachusetts state court system where it started. Family Dollar had removed the case to federal court. Lawyers for the Store Managers opposed that removal, and asked the judge to send the case back to the state court system. The judge agreed.
What is the case about?
Store Managers at Family Dollar Stores spend lots of time unloading trucks, stocking shelves and working the cash register. They spend very little time actually managing the store. For these reasons, they’ve sued claiming that their classification as “executives” by Family Dollar is wrong. They disagree that their primary duty is management. Instead, they believe their primary duty is to perform the same hourly work as their stock clerks and sales associates. They work long hours, sometimes 50, 60 or 70 hours per week, with no overtime pay.
Is there precedent?
In 2006, a jury in Alabama awarded a class of over 1,400 store managers back pay. The total award was over $54,000,000. Since then, Family Dollar claims to have “retooled” the position, but store managers around the country disagree. Lawsuits have been brought in many states including Connecticut, Pennsylvania, Missouri and Colorado. In Connecticut, the company’s motion to dismiss the case was denied by the court, leaving it for a jury to decide if the position is mostly hourly or mostly managerial.
What happens next?
Lawyers for the Store Managers first have to defend a recent motion designed at moving the case back to the federal courts. Then, the litigation will proceed. The lawyers will exchange documents and witness’ testimony will be taken. If the case isn’t settled, then a trial will occur.
Can other Store Managers join?
Yes. Class actions are designed to represent the interests of the entire class of store managers in Massachusetts. The plaintiff and his lawyers believe that the decision of whether the store managers are mostly managers or mostly stock clerks/cashiers is a decision that is common to the entire class.

Store Managers are being represented by the law firm of Lichten & Liss-Riordan in Boston and the Hayber Law Firm in Hartford.


Are auto damage appraisers entitled to overtime pay?

As an attorney, I fully understand the frustration that comes when we just can’t give a straight answer to a simple question.  The problem is that different judges can rule differently on the same issue.  When that happens (we call that a “split of authority”) things get confusing.

The law regarding auto damage appraisers is a good example.  Some courts have ruled that they get overtime pay and some have ruled that they don’t.

Any historical analysis starts with the U.S. Department of Labor.  Here is what they have said since 1975:

Auto damage appraisers:  Appraisers whose functions are to inspect damaged motor vehicles in order to estimate the cost of the necessary repairs, and who also reach an “agreed” price with the repair shop on the cost of repairs, do not customarily and regularly exercise discretion and independent judgment as required by Reg. 541.2.  Their work consists essentially of the determination of facts, and in making their estimates they are guided primarily by their skill and experience and by written manuals of established labor and material costs.  However, there may be sufficient elements in the job to permit the application of the upset salary rule.

Field Operations Handbook,  Section 22d01.  A federal judge in Connecticut ruled in favor of auto damage appraisers in 1994.  Reich v. AIAC, 902 F.Supp. at 326 (granting judgment for automobile damage appraisers).  Another Connecticut judge ruled in favor of auto damage appraisers in 2007 (Neary v. Metropolitan Prop. & Cas. Ins. Co., 517 F.Supp.2d 606 (D.Conn. 2007).  The Ninth Circuit Court of Appeals wrote this:

Appraisers who merely inspect damaged vehicles to estimate the cost of labor and materials and to reach an agreed price for repairs with the repair shop have not been considered as the type of employees who customarily and regularly exercise discretion and independent judgment. . . .  In making their estimates, they are guided primarily by their skill and experience and by written manuals of established labor and material costs. . . . DOL Wage & Hour Div. Op. Ltr., at 1-2 (Feb. 18, 1963). 

In contrast, an adjuster “investigates the validity and the extent of liability of a claim and negotiates settlement . . . irrespective of whether the claim is one for property damage or for personal injury.”  Id. at 2.  And in 1957, the DOL opined that if adjusters are given “reasonable latitude in carrying on negotiations with the insured, the results of which form the basis of their recommendations, they may be [exempt].”  DOL Wage & Hour Div. Op. Ltr., at 2 (Oct. 24, 1957).  If those adjusters had authority to make settlements, that would be “stronger evidence of their exercise of discretion and independent judgment.”  Id.In re Farmers Ins. Exch., 466 F.3d 853, 861 (9th Cir. 2006).

                Occasionally, courts have ruled that auto damage appraisers are more like adjusters and are exempt.  The Seventh Circuit Court of Appeals ruled in 2008 that Material Damage Appraisers at CC Services were not entitled to overtime wages.  Roe-Midgett v. CC Services, Inc., 512 F.3d 865 (2008).  These workers had settlement authority up to $12,000.  The D.C. Court of Appeals ruled that “auto damage adjusters” at GEICO are not entitled to overtime pay.  Robinson-Smith v. GEICO, .. F.3d. .. (2010).

                The key difference seems to be the extent to which the employee handles total loss claims and negotiates with insureds.  The more total loss and the more negotiation, the more likely courts are to rule that they are exempt adjusters.  On the other hand, the more the employees work is limited to appraising damaged vehicles and following company guidelines, the more likely he is to be non-exempt.


BJ’s sued a third time for same wage violation!

Are overtime class actions deterring employers?  Evidently not!

In 2008, BJ’s Wholesale Club was sued for not paying overtime wages to its “mid-managers.”  That lawsuit alleged that “mid-managers” worked over 40 hours per week without any extra pay and that they did not qualify for the “executive” exemption because their primary duty was not management.  Employees who spend most of their time and efforts performing hourly tasks and only occasionally act as managers cannot be considered “executives” under the law.

This first lawsuit settled for over $9 million dollars within one year.  Despite this multi-million dollar payout, BJ’s continued to deny its mid-managers overtime pay.  They maintained their “exempt” classification and benefited from the many long hours these employees worked without overtime premiums.

In 2012, BJ’s was hit with another overtime lawsuit for a smaller group of mid-managers.  That case settled for $2.7 million, and, again, you guessed it – BJ’s continued to maintain the “exempt” classification of its mid-managers.

This time, however, BJ’s took internal steps to prevent another class action lawsuit.  In April 2013, it rolled out a new employee handbook which contained language designed to keep employees away from the courts and to prevent class actions.  It called its program the Open Door Solutions plan,  BJ’s President Laura Sen introduced this plan as a way to “keep the lines of communication open” with her “Team Members.”  She also claimed that the plan allowed BJ’s employees to “achieve a thoughtful resolution of any issues.”  In fact, this plan’s central purpose was to avoid future costly class action litigation and to enable BJ’s to continue its exempt classification of its mid-managers.  The documentation included a “Class Action Waiver”, which was designed to prevent class actions by BJ’s employees.

Well, it didn’t work.  Recently, a third class action was filed against BJ’s by mid-managers.  This lawsuit is on file in the District of Connecticut.  It claims, like the lawsuits before it, that mid-managers spend most of their time doing hourly work (i.e., not managing) and that they should be compensated for their overtime hours.  One interesting note, the class action waiver prohibits class arbitrations, but not class actions in court:

“Notwithstanding this section, BJ’s agrees that I am not waiving my right under Section 7 of the National Labor Relations Act to file or participate in a class or collective action in court,…” 

This language leaves the door wide open to a class or collective action in court.

Final thoughts?  Wouldn’t it be easier and fairer to simply pay these hard working employees their fair wages? Is it so important to BJ’s  bottom line to classify these employees as “executives?”  Wouldn’t it be better to pay them rather than BJ’s lawyers?  Like I said, as expensive as these class actions are to defend and settle, companies still find it profitable to classify workers as exempt wherever they can.  The amount they save in labor costs is usually far greater than what they pay in settlements and attorneys’ fees.  Too bad for hard working mid-managers.  They deserve to be paid for the hours they work – all of them!

Grocery store worker

Fresh Market “Chinese Overtime” Challenged in Court! Plaintiffs move for notice to go out to class of Department Managers.

Most employers pay non-exempt workers an hourly rate, say $15.00, and they pay time and a half when they work more than 40 ($22.50).  What if I told you that some companies only pay ½ time (not time and a half) for overtime hours?  Would you say, hey they can’t do that?  Well, you might be right.

While the normal way of paying overtime is time and a half, there is a little known and little used regulation in the federal wage laws that permits half time (or less) to be paid.  They call in the “Fluctuating Work Week” method of overtime pay.  Sometimes you may hear it referred to as “Chinese Overtime.”

The general rules are that the employee must make a fixed salary for their hours from 1 to 40, and then they get a ½ time rate for hours over 40.  It is very complicated, confusing, and usually unfair to workers.

Take this example.  A worker makes $800 per week.  Most would convert this into an hourly rate of $20.  Overtime would then be $30 (time and a half).  Under this scheme, if that worker worked 50 hours in a week, they’d only get $8 per hour or $80 total for their 10 overtime hours.  Most people would believe that they should get $300.

The Fresh Market uses this pay scheme to pay its Department Heads or Department Managers.  A lawsuit has been filed in Federal Court in Connecticut challenging this pay scheme.  Among other things, it claims that The Fresh Market’s deferral of some of the Department Head’s compensation into quarterly and year-end bonuses violates this law.  The U.S. Department of Labor in 2011 rejected attempts by employers’ lobbies to permit bonuses for employees paid via the Fluctuating Work Week.  The lawsuit also claims that The Fresh Market failed to clearly explain this pay scheme to its Department Heads. 

Recently, lawyers for the Department Heads have filed a motion with the court asking permission to send a notice out to Department Heads and Department Managers around the country letting them know of their rights and that they can join the lawsuit.  That motion is still pending.  The Fresh Market has opposed that motion, claiming that all Department Heads are different.
If the court grants the motion, Fresh Market Department Heads around the country will receive notice and a consent form that they can use to join the case.  More information can be obtained by visiting the website of the Hayber Law Firm.


Progressive Appraisers – Are they entitled to Overtime wages?

The U.S. Department of Labor and many courts have ruled that auto damage appraisers are entitled to overtime wages.  Progressive insurance company does not pay overtime wages to its automobile damage appraisers (“MRRs” or “Claims Adjuster – Auto Damage”).  While some courts in some cases have ruled that appraisers who also perform claims adjusting duties are not entitled to overtime, it is not clear that these appraisers are actually “adjusters.”

Several years ago, there were a few overtime class actions for auto appraisers here in Connecticut, and th0se cases ended successfully.  In one case, a Connecticut judge denied the employer’s motion to have the case dismissed.  Because of this case and some others, the law in Connecticut is favorable to auto damage appraisers who work more than 40 hours per week and do not earn overtime pay.

In these lawsuits, appraisers usually claim that their work is limited to using a computer system to obtain an appraisal for the damage to the car.  They then issue a check, either to the insured, or the auto body shop.   In some cases, they also have the authority to negotiate and settle total loss claims, but more and more companies are assigning those duties to total loss specialists.   When an employee’s duties are limited to appraising and paying auto body shops, they are usually entitled to overtime wages.

Many appraisers work long hours driving to insured’s homes, to auto body shops, and to the home office.  They often start working at home in the morning and continue working after they get home at night.   Many companies have reclassified these workers to hourly, but a few have not.


Clarks managers’ not true “inside sales”, lawsuit claims!

Shoe workerClarks Companies

Clarks Companies, N.A., a national shoe retailer, is having its “inside sales” pay plan challenged in court.

Usually, retailers try to save money on salaries by calling their Assistant Managers and Store Managers “executives” and not paying them overtime wages.  True executives under the law are not entitled to overtime pay.  Retailers sometimes stretch this definition and classify managers as “executives” even though they spend the vast majority of their time unloading trucks and stocking shelves.

In a recently filed federal class action, a new employer practice is being challenged.  Clarks Companies, a shoe retailer with stores nationwide, pays its store managers, assistant managers, and full time key holders a very low base salary (from $200 to $300 per week) and commissions and bonuses.  This pay scheme cannot comply with the executive exemption, since the salary needs to be at least $455 per week.  It is closest to the federal exemption for inside sales persons at a retail establishment. 

The lawsuit claims that this compensation plan violates Federal , Connecticut and Massachusetts law.  It claims that federal law is violated because the commissions do not equal at least one half of the employees’ total pay.  It claims that Connecticut law is violated for many reasons, including that the employees “sole duty” is not simply sales (they also manage).  It claims that Massachusetts law is violated because Massachusetts has no such “inside sales” exemption. 

If this lawsuit is successful, Clarks will owe back overtime pay to all of its store managers, assistant managers and full time key holders for the past three years. 

The plaintiffs are being represented by the Hayber Law Firm, in Hartford, Connecticut.