New Jersey Restores Exemption for Commissioned Sales Employees

Effective February 21, 2012, New Jersey corrected an “unintended consequence” of a 2011 amendment to state wage and hour regulations that inadvertently resulted in the omission of the exemption to minimum wage and overtime law commonly referred to as the “inside sales” exemption.  While this correction restores the “inside sales” exemption under New Jersey law, questions remain as to the scope of this exemption and how it will be applied in light of the recent trends in interpretation of the exemption’s federal counterpart.

Consistent with the federal Fair Labor Standards Act (“FLSA”), New Jersey’s wage and hour law includes exemptions for executive, administrative, professional and outside sales employees. See N.J.S.A. 34:11-56a4.  In a move that was aimed to harmonize the application of these exemptions under New Jersey state law and federal law, in September 2011, the New Jersey Department of Labor and Workforce Development (“DLWD”) amended its wage and hour regulations to specifically adopt the federal regulations at 29 C.F.R. Part 541 (which define the tests for the executive, administrative, professional, computer, and outside sales employees).  This move to a “lock-step” approach with the FLSA seemingly simplified things for employers seeking to determine who is “exempt” and who is “non-exempt” from overtime law – for example, gone is the need to compare New Jersey’s separate definition of a “bona fide executive” to the FLSA’s definition.

However, an unintended consequence of this September 2011 amendment, was the DLWD’s inadvertent omission of the exemption commonly referred to as the “inside sales” exemption.   The previous version of New Jersey’s law closely tracked the exemption contained in Section 7(i) of the FLSA, which applies to commissioned sales employees working in retail or service establishments.  The DLWD’s September 2011 amendment, however, did not effectively preserve this exemption because it is not addressed in 29 C.F.R. Part 541.

The DLWD’s February 23, 2012 amendment restores this exemption, and the regulation now defines “administrative” employees to include “an employee whose primary duty consists of sales activity and who receives at least 50 percent of his or her total compensation from commissions and a total compensation of not less than $400.00 per week.”  See N.J.A.C. 12:56–7.2(c).

While the February 23, 2012 amendment restores the New Jersey exemption for commissioned sales employees, New Jersey’s version of this exemption differs from the FLSA Section 7(i) exemption in a few important ways.  In particular, the New Jersey exemption requires employees to have a “primary duty” of sales; such a requirement is absent from the FLSA exemption.  Also, the “salary basis” component of New Jersey’s exemption differs from FLSA Section 7(i): the New Jersey exemption applies to employees earning $400 per week, while the FLSA exemption applies to employees earning at least 1.5 times the minimum wage (i.e. $7.25 x 1.5 x 40 hours = $435).

Perhaps most importantly, it may be difficult for New Jersey employers to predict whether New Jersey’s restored exemption will apply to their particular business.  Notably, the exemption under Section 7(i) of the FLSA applies only to “retail or service establishments.”  The federal regulations elaborate that the “retail concept,” however, does not apply to an entire host of business categories.  Examples include most employers in the financial industry (including banks, investment counselors and brokers, and mortgage and insurance companies), engineering firms, medical and dentals clinics, painting and roofing contractors, among many others which are listed at 29 C.F.R. § 779.317.

The current version of the New Jersey exemption, however, does not appear to be limited by this same “retail concept.”  The result would appear to be that many commissioned sales employees working outside of the retail or service industry who would not otherwise qualify for the federal exemption under Section 7(i) of the FLSA, may qualify as exempt employees under New Jersey law.  In light of New Jersey’s recent move to harmonize its wage and hour laws with the regulations under the FLSA, it remains to be seen how broadly or narrowly New Jersey’s restored “inside sales” exemption will be interpreted by courts.

In sum, New Jersey’s attempt to simplify the always difficult issue of employee classification appears to have succeeded in some respects, but falls short with respect to commissioned sales employees.  The prudent approach for employers remains to ensure that these employees will be exempt under both federal and state law.