Is the Person Providing You Samples at Costco an “Outside Salesperson”?

Is the Person Providing You Samples at Costco an “Outside Salesperson”?

The California Court of Appeals recently held that whether an employee at a fixed site that isn’t owned or leased by the employer is subject to the outside salesperson exemption is determined by the extent to which the employer maintains control or supervision over the employee's hours and working conditions.

Background

Warehouse Demo Services, Inc., the in-house product demonstration company for Costco (the “Company”) hires people to perform demonstrations of products at Costco’s warehouses. These demonstrators are classified as “part-time, nonexempt, hourly employees eligible for overtime pay according to state and federal law.” They’re assigned to a single Costco and don’t move from warehouse to warehouse.

The Company collects floor space rent from its vendors who want demonstrations of their products. It gives payments to Costco every month. It doesn’t lease any space from Costco but maintains office space within each location where it has demonstrations. On average, the Company assigns 22-25 demonstrators, one event manager, and two shift supervisors to each Costco location. Event managers are salaried employees and handle managerial tasks such as scheduling demonstrators, setting sales quotas, and handling paperwork. Shift supervisors help cover demonstrations and help with paperwork.

The Demonstrator was employed by the Company for five years. At the start of her employment, she received a booklet from the Company titled, “Demonstrator Handbook.” Her stated job summary was to “[p]erform product demonstrations and drive sales with friendly member interaction, enthusiastic product information, and sample availability.” The handbook included instructions on how to set up for a demonstration upon arriving at Costco and a “Demo Quality Checklist” that included tips on how to provide “[f]riendly member interaction” and “[e]nthusiastic [p]roduction [i]nformation” to drive sales. The handbook also provided that a supervisor would “work hands-on with [the demonstrator] to perform the highest quality demo as outlined in the Demo Quality Checklist.”

The Demonstrator Files a Class Action

The Demonstrator filed a class action complaint against the Company alleging various California Labor Code violations, including failure to pay wages and/or overtime, failure to provide meal breaks, and failure to provide rest breaks. The Company filed a motion for summary judgment on the grounds that she lacked standing to bring the subject claims because she fell under the outside salesperson exemption.

The Company argued that the Demonstrator met the requirements for an “outside salesperson” because she was engaged in selling away from the Company's place of business, as the Company didn’t own or lease space at Costco. Therefore, the requirements for overtime, wages, and meal and rest breaks didn’t apply to her. Nonetheless, the Company's policy included paying overtime to demonstrators like the Demonstrator.

The Demonstrator argued that the Company didn’t meet its burden of showing that she qualified as an “outside salesperson.” She contended that although the Company didn’t lease any space at Costco, it exerted extensive control and supervision over its office and demonstration areas within Costco such that she didn’t work “outside” of the Company’s place of business for purposes of the outside salesperson exemption. She also argued that the exemption didn’t apply because she spent a lot of time on non-sales tasks such as setting up her cart and preparing and demonstrating the product. In fact, the Demonstrator contended that demonstrators were instructed not to directly ask for a sale, but to tell customers where the product could be found at the store to encourage its purchase.

What is “The Outside Salesperson Exemption”?

California Court of Appeals Judge Rebecca Wiseman wrote in her opinion that “outside salespersons” in California are exempt from statutory overtime, minimum wage, reporting time, and meal-and-rest break requirements. The Industrial Welfare Commission (IWC) creates wage orders that fix “minimum wages, maximum hours, and standard conditions of labor for all employees.” One wage order defines “outside salesperson” as “any person, 18 years of age or over, who customarily and regularly works more than half the working time away from the employer's place of business selling tangible or intangible items or obtaining orders or contracts for products, services, or use of facilities.” Based on this definition, to qualify as an “outside salesperson,” an employee must:

  1. Work more than half the time away from his or her employer's place of business; and
  2. Be engaged in sales.

The main reason for this exemption is because outside salespersons generally control their own hours and are paid on a commission basis. The Division of Labor Standard Enforcement (DLSE) stated that outside salespeople have historically been exempt “because it's very difficult to control their hours and working conditions. They set their own time, and they're on the road, they call on their customers … . [R]arely do you know what they're doing on an hour-to-hour basis.” A classic example that may come to mind is a door-to-door vacuum salesperson who is on the road traveling from residence to residence.

Did the Demonstrator Work Away from the Company's Place of Business?

The Company relied on the DLSE's 1998 letter in arguing that for the outside salesperson exemption to apply, an employer's “place of business” means property that is “owned or controlled by [the] employer.” But Judge Wiseman found that the underlying facts in this case presented the perfect example of when an employer can (and does) control its employees' hours and working conditions on property it does not own or lease.

First, the Company is Costco's in-house product demonstration company and is exclusive to Costco. Although the Company is headquartered in Washington, all of its event managers, shift supervisors, and demonstrators are assigned to work in Costco warehouses. In other words, Costco is the only place it conducts business via its demonstration of products. Though it doesn’t lease space within Costco, it maintains an office inside each warehouse where its employees can clock in and out, store and clean equipment, and handle paperwork. As a result, for all intents and purposes, the Company operated out of and treated all these different Costco warehouses as their satellite branches or offices.

Second, unlike the typical traveling salesperson who sets his or her own hours and decides when and where to work, the Demonstrator had a set schedule every week and worked six-hour shifts. She clocked in before she started working, clocked out after she stopped working, and reported her lunch breaks when she clocked out. The Demonstrator was only assigned to work at one Costco location at a time, and in fact worked at the Almaden location for about five years before transferring to another Costco. She was supervised, and her schedule and sales quota were set by an on-site event manager who’d been assigned to her warehouse by the Company.

The Court of Appeals noted that the Demonstrator was not only assigned to one Costco location, but was required to remain in one designated area within that Costco for almost the entirety of her six-hour shift. The only time she could leave her designated area was when another demonstrator came to relieve her so that she could take a break. Judge Wiseman explained that the very reason the outside salesperson exemption was created was because it was hard for employers to monitor and control the hours of employees who regularly traveled or were on the road. The exemption was not intended to apply to employees like the Demonstrator, whose hours, schedule, and (exact) location of work were controlled by their employer.

Judge Wiseman explained that the 1998 DLSE letter didn’t state that an employer must own or control a property for it to be considered its “place of business” for purposes of the exemption. The letter was written in response to a specific question, and the DLSE concluded that an employer's place of business was not limited to its principal place of business or headquarters and that these employees did not fall within the exemption. The DLSE reasoned that “[a]n employer can more easily control and monitor the hours and working conditions of salespersons who perform their sales work on property that is owned or controlled by the employer.” This included property miles away from the employer's main office. However, this doesn’t mean that the only way an employer can control its employees' hours and working conditions is if it owns or controls the premises on which the employees work, as evidenced by the facts in this case.

The Court of Appeals reversed the order granting summary judgment in favor of the Company. (Espinoza v. Warehouse Demo Services, Inc. (California Court of Appeal, 1st Appellate District, 12/23/22).

Bottom Line

The outside salesperson is designed for salespersons who control their own hours and are paid on a commission basis. Employers rarely know what they're doing on an hour-to-hour basis. The exemption won’t be found to be applicable where an employer exerts extensive control and supervision over its location, even if it’s not the company’s place of business.

Danielle G. Eanet can be reached at Eanet, PC in Los Angeles, CA at danielle@eanetpc.com.

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