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Inside Out

Aug. 1, 2003
A bill recently passed by the House of Representatives could pave the way to new compensation standards for inside sales positions.In a move that could

A bill recently passed by the House of Representatives could pave the way to new compensation standards for inside sales positions.

In a move that could mark a major breakthrough in the fight for inside sales reform, the U.S. House of Representatives voted to eliminate a requirement that companies pay inside salespeople overtime pay.

The Sales Incentive Compensation Act, which the House passed last week on a vote of 261-165, would allow inside salespeople to be exempt from the overtime pay laws, which restricted their earning potential to a 40-hour work week unless their employer was willing to pay overtime. The proposed legislation would require employers to pay inside salespeople in a commission-based pay structure much like they pay their outside salespeople. The theory behind this legislation is that because of modern technology like telephones, fax machines and computers, inside salespeople have many of the same responsibilities as outside salespeople and should be compensated in the same manner.

The 1938 Fair Labor Standards Act exempts traveling salespeople from rules that employers must compensate employees at 1.5 times the basic hourly rate for work beyond 40 hours a week. The overtime exemption under the bill is limited to people who have specialized or technical knowledge of their product, who have an established customer base and who have annual incomes of at least $22,500-$16,000 in base pay and $6,500 in commissions.

"Passage of this legislation sets us on a clear path to fixing a blatantly unfair provision in the Fair Labor Standards Act," says Dirk Van Dongen, president of the National Association of Wholesaler-Distributors (NAW), Washington, D.C. "We are pleased that inside sales associates in the wholesale distribution industry may finally get the professional recognition and financial opportunities they so rightly deserve."

One of the supporters of the bill, Rep. Robert E. Andrews, D-N.J., says, "Salespeople who can substantially increase their salary by earning more commissions ought to be allowed to work longer hours and perform their jobs more effectively, in order to make more money. Unfortunately, current law keeps them from earning as much as they could."

"I definitely think this is an important thing for our industry," says Mike Barker, president of Springfield Electric Supply Co., Springfield, Ill., and incoming chairman of the National Association of Electrical Distributors (NAED), St. Louis, Mo. He urges electrical distributors to contact their senators in support of the upcoming Senate bill. "Moving the issue to this point is something the industry's been looking forward to for several years, but it's only halfway home."

One distributor who asked not to be named says while the legislation is a step in the right direction, because of the low margins in the electrical industry it would be difficult for many distributors to pay both inside and outside salespeople a commission on sales. He would like to see distributors have more leeway in designing their own compensation packages.

"If an inside salesperson takes or writes an order or generates a piece of business with a customer that is also assigned to an outside salesperson, to pay commission twice is just not feasible because the margins under which we operate are so tight. The national average for electrical distributors is just under 20% gross margin. Then, when you have 'job site,' some of that stuff goes for single-digit gross margin, 5% at times, and it's just impossible to do that."

Becky Relic, NAW's senior director, government relations for the NAW, says some distributors may find it hard to justify compensating inside salespeople and outside salespeople in a similar fashion.

"If you eliminate the distinction between inside and outside salespeople, you're going to have to pay them in the same manner," she says. "I think that's a hurdle a lot of people are having a hard time getting over. When you look at almost any industry, outside salespeople are paid on some sort of commission basis. If the premise we're working on is that many outside salespeople are being moved inside, then they should be paid in the very same manner."

The bill now heads to the Senate, where Sen. Paul Coverdell (R-Ga.) recently introduced a companion bill, S. 2144. At press time, the Senate's Committee on Labor and Human Resources was considering the bill.

"It is our hope that the Senate follows the lead of the House and passes this important piece of legislation, so integral to the competitiveness of businesses in the wholesale distribution industry," says Alan Kranowitz, NAW senior vice president-Government Relations. "We are confident that this bipartisan piece of legislation is fair and equitable, supports the needs of inside sales employees and addresses unfair workplace concerns."

One of the cases frequently cited in arguments favoring the legislation was a 1991 case involving an electrical distributor. In Martin v. Cooper Electric Supply Co., the 3rd U.S. Circuit Court of Appeals ruled that inside salepeople did not qualify for exemption as administrative employees, nor did they meet requirements for exemption as outside salespeople. Among other requirements in the existing law, an outside salesperson must be customarily and regularly engaged in sales activities away from the employer's place of business.