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HR Esq

The Pitfalls of Employing Sales People

Devora Lindeman
Contributor: Devora Lindeman
Posted: 12/20/2011

When the economy begins to improve (or when a business puts attention on its own improvement), adding sales people is a frequent focus. Unfortunately, there are a number of hidden employment law issues that businesses are often unaware of. When the Department of Labor comes knocking, these are the main "gotcha’s":

1) Sales People May Be Entitled To Overtime Pay: Only outside sales people (think old fashioned Fuller Brush Man, the Avon Lady, the Encyclopedia Sales Person— out in the field, knocking on doors, plying their wares at the client’s site), and a few retail sales folk, are generally found to be exempt from the federal overtime pay requirements. Inside sales people (that bank of folk staffing your telephones or otherwise contacting your customers) generally are entitled to overtime pay. Yes, I know, it seems a little harsh when those people are encouraged to work more hours to get their sales, and are incentivised with commissions payments to do so, to then have to pay them overtime pay. However, that is the case under both U.S. federal and state law.

2) Those Commissions Need To Be Added To the Regular Rate to Calculate Overtime: When calculating overtime pay, most employers know that employees get time-and-a-half based on their hourly rate for hours worked over 40 in a work week. However, their "hourly rate" includes the commissions earned. When calculating overtime pay for sales people, employers need to add in those commissions to calculate the sales person’s regular rate of pay on which their overtime pay is calculated.

3) Sales People Need to Punch a Time Clock: Since most sales people need to be paid overtime pay, employers need to keep track of the hours they work each week. That means, that they need to punch a time clock, or keep a time sheet, or otherwise keep track of the time they work – not just out in the field, but back in the office or back at home completing forms and otherwise doing their admin.

4) Commission Agreements May Need To Be In Writing: Some states may require that commission agreements for sales people need to be in writing. Or, like New York, they could utilize a presumption that if the agreement is not in writing, then the Department of Labor is going to accept whatever the sales person says the commission agreement is. That may not bode well for the company.

5) Commissions May Need To Be Paid Frequently: State law can govern when commission need to be paid, and it may be more frequently than quarterly (which is when many companies pay sales commissions). Since U.S. state laws vary, it is prudent to be familiar with the requirements of your state.

6) Commissions Owed On Termination: Even when companies have written commission agreements, they often forget to include information about how to pay sales commissions after the employee’s employment is terminated. Is there any entitlement to commissions based on sales that close (or for which payment comes in) after the sales person’s employment is terminated? These are the type of commission claims that we see most often—a sales person is terminated and claims that he or she was not paid all of the commissions earned. These claims are easily handled when the formula is spelt out in a written agreement signed by the sales person.

7) Wait! Those Are Our Customers!! When a sales person leaves your employ, he or she often goes to a competitor . . . taking your customers along. Companies that implement non-competition and non-solicitation agreements can add a layer of protection that can prevent, or at least deter, this situation. Depending on state law, the company may not be able to prevent the sales person from working in his or her field, but by using these agreements you should be able to prevent a sales person from taking your customers . . . or your other sales people!

8) Wait! Those Are Our Customers (revisited). When you hire a sales person away from a competitor, he or she may very well have a non-competition/non-solicitation agreement with the prior employer. If you allow (or in any way encourage) the new sales person to violate his or her agreement, you could very shortly be on the receiving end of a TRO ("temporary restraining order" asking the court for certain immediate injunctive relief).

Sales people can be the company’s life blood—or can drain the life right out of the company by stealing customers and causing expensive litigation. We see this all too often. Yet, by knowing the above pitfalls, a company can put in procedures to protect against these occurrences and can get on with the business of their business.

Devora Lindeman
Contributor: Devora Lindeman
Posted: 12/20/2011