Employer Beware – Is Your Startup Improperly Classifying Its Sales Team?

By: Benjamin Jacob

As an employer, when you think of hourly workers you probably have a certain picture in your mind of who fits that description. Most likely your idea of an hourly worker does not include your high-flying startup’s sales team composed of college grads and experienced tech professionals who pull in six figures annually.In this post, we’ll refresh on what worker classification is generally, then take a look at the inside sales exemption and its oft-misunderstood requirements that can lead to potential liability for companies at inopportune times.

Worker Classification

Worker classification simply refers to how a business classifies the workers it engages to operate and run its operations - employees, independent contractors, full-time, part-time, seasonal, and temporary are different types of workers a business might engage.In the past decade, the most frequently reported-on worker classification/misclassification issue has largely been driven by the rise of the gig economy and its attendant problems – the Ubers of the world classifying its workers as independent contractors and the ensuing (and still ongoing) war between powerful tech companies, government, and gig economy workers to define what an independent contractor is in today’s society...and what minimum level of benefits should be expected.A different, important classification issue is whether a worker is subject to overtime laws and and whether the position is subject to minimum wage requirements. For many tech startups, sales personnel are well-compensated and the least obvious candidates to be classified as hourly workers.

Inside Sales Exemption

Many startups are unaware that their sales team must meet the requirements of what’s known as the “outside sales exemption” or “inside sales exemption” under both state and federal law in order to be properly classified as exempt (i.e., salaried) workers. Otherwise – such workers are non-exempt employees eligible for overtime and their compensation must satisfy minimum hourly wage requirements. In our experience, a surprising number of startups and companies mistakenly believe the inside sales exemption is satisfied by (a) having the worker engage in sales from the employer’s office, (b) having a contract that states the worker is exempt, and/or (c) paying the worker an annual salary.

However, none of those are enough on their own to satisfy state and federal law - and failure to be in compliance could place your company’s future in jeopardy in more ways than one.

Under federal law, the inside sales exemption requires that employees (a) work in the “retail and service industry” as defined within the Fair Labor Standards Act, (b) earn more than 150% of the minimum wage, and (c) receive at least 50% of their income from commissions.With respect to state law, where your employee resides and works from dictates determines the applicable state law (i.e., if you are a Delaware corporation with a California employee, the Delaware corporation will be subject to California’s employment state law with respect to that CA employee). Under California state law, to successfully take advantage of the inside sales exemption, an employee must (a) receive more than 50% of his or her compensation from commissions, (b) work in a professional, clerical, technical, mechanical, or similar occupation, or (c) earn more than 150% of the minimum wage.

Furthermore, a “commission” for purposes of the inside sales exemption needs to be approximately proportional to the employee’s productivity. Incentive compensation that consists of fixed amounts paid for achieving a certain discrete milestone is more likely to be treated as a bonus thereby invalidating your company’s reliance on the inside sales exemption.

So what do you do if you’ve come to the conclusion your sales team is improperly classified? Reach out to your company’s counsel and develop a strategy to address the legal risks and strategic business considerations involved to ideally keep driving the business forward unimpeded.

If you have questions about the inside sales exemption or any other related corporate law matter, please feel free to contact any one of our attorneys at info@fourscorelaw.com.

Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, throughout the Southeast and in Silicon Valley / San Francisco. We also represent venture capital funds and other investors who invest in companies throughout the U.S. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.