Wage and hour lawsuits have risen drastically in recent years. The cost of defending such lawsuits has also greatly increased because many wage and hour lawsuits at both the state and federal levels involve class, collective, or multi-plaintiff actions. An example of a recent case in which a Texas federal judge dealt a blow to a developer by allowing a group of salespersons to proceed together as a class is Edwards v. KB Home, 3:11-cv-002420 (S.D. Tx. Sept. 25, 2012). The difficulty for KB Home started in 2011 when forty (40) current and former on-site salespeople filed a collective action – claiming they were improperly denied overtime pay because KB Home had misclassified them as exempt. The evidence showed that KB Home had treated the salespersons as a “homogenous group” and based the denial of overtime on the Outside Sales Exemption. While the Outside Sales Exemption is a proper basis for avoiding overtime pay when applied correctly, it apparently was not done so in this case.

The Outside Sales Exemption is found in 29 C.F.R. §541.500(a) which provides that an employer can avoid the payment of overtime to a salesperson if two criteria are met: (i) the employee’s “primary dut[y] is to make sales, or obtain customers’ order or contracts for services or for the use of facilities,” and (ii) the employee “customarily and regularly perform these duties away from the employers’ place of business.” As a general rule, in order to claim an employee is exempt under the Outside Sales Exemption, an employer should ensure that at least 80% of the employee’s time is spent generating sales. Work that furthers the employee’s sales efforts, such as writing sales reports and planning itineraries, is counted as time spent generating sales. 29 C.F.R. § 541.500(b). Secondly, the employer must show that the employee regularly performed work away from the employer’s place of business. If an employer cannot demonstrate these criteria, it would likely be in a position similar to KB Home, with the court allowing a class of employees to proceed in an unpaid overtime case.

Not surprisingly, it is more challenging for employers to defend overtime claims where multiple plaintiffs are in one case. To minimize the risk of the outcome KB Home experienced this week, it makes sense for employers to obtain a legal review of any positions they designate as exempt from the payment of overtime.