Sales representatives and commission-based workers have some unique exemptions under California law, but the rules are nuanced. This guide explains when sales workers can be independent contractors versus employees.
The Outside Sales Exemption
Who Qualifies
The "outside sales" exemption applies when a worker:
- Is 18 years or older
- Spends more than 50% of working time away from employer's place of business
- Is engaged in selling tangible or intangible items or obtaining orders/contracts
Outside salespeople are exempt from overtime and minimum wage requirements.
Outside vs. Inside Sales
| Factor | Outside Sales | Inside Sales |
|---|---|---|
| Location | >50% away from office | Primarily at office/desk |
| Activities | In-person client meetings | Phone, email, online |
| Overtime | Exempt | Non-exempt (usually) |
| Minimum Wage | Exempt | Required |
Remote Work Complications
Working from home is NOT "outside sales." A salesperson who works from their home office making calls is an inside salesperson, not outside. "Outside" means physically visiting customers/prospects.
AB5 and Sales Contractors
When Can Sales Reps Be Contractors?
Even with the outside sales exemption (which affects overtime), AB5's ABC Test still determines employee vs. contractor status. Sales contractors may work if:
- Prong A: No control over how sales are made
- Prong B: Sales are NOT the company's usual business (rare - if you sell products, sales IS your business)
- Prong C: Salesperson has independent business, multiple clients
The Reality
Most sales contractor arrangements fail Prong B. If your company sells products or services, salespeople are doing your "usual course of business."
Commission Structures
For employee salespeople, California has specific commission rules:
- Written Agreement Required: Commission plans must be in writing
- Timing: Must pay earned commissions on time
- Chargebacks: Complex rules about clawing back commissions
- Advances: Rules about draws/advances against commission
- Termination: All earned commissions due immediately upon termination
Manufacturer's Reps / Sales Agents
Independent manufacturer's representatives may qualify as contractors if:
- They represent multiple manufacturers
- They have their own sales business/agency
- They control their own methods
- They may qualify for professional services or B2B exemption
Best Practices
- Document Work Location: Track whether salespeople are truly "outside"
- Written Commission Plans: Required for all employee salespeople
- Evaluate Contractor Status: Apply ABC Test carefully
- Consider B2B: Sales agencies vs. individual reps