UPDATE: Further developments on the New Jersey regulations occurred following initial publication of this ASAP. Please see our most recent ASAP, New Jersey Issues Proposed Regulations to Restore Its Exemption on Commissioned Sales Employees.

There has been an important change in New Jersey law which may require employers to take immediate action: In recent amendments to its overtime regulations, New Jersey eliminated the exemption for sales employees paid on commission, which closely tracked an exemption in Section 7(i) of the Fair Labor Standards Act (sometimes known as the "inside sales" exemption). Because New Jersey law is now more protective than the FLSA, at present, it appears likely that employers cannot classify commissioned inside sales employees as exempt from overtime pay.

Like the FLSA, the New Jersey overtime pay statute includes exemptions for executive, administrative, professional and outside sales employees. See N.J. Rev. Stat. § 34:11-56a4. Although the New Jersey statute does not contain an exemption similar to the FLSA Section 7(i), the New Jersey regulations had defined "administrative" employees as including "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." N.J. Admin. Code § 12:56-7.2(b).

New Jersey recently amended Section 12:56-7.2 of their regulations so that it simply adopts the federal regulations at 29 C.F.R. Part 541; the regulation now states: "Except as set forth in (b) below, the provisions of 29 CFR Part 541 are adopted herein by reference."

The FLSA Part 541 regulations define the exemptions in Section 13(a)(1) of the Act – executive, administrative, professional, computer and outside sales employees. Part 541 does not cover the FLSA Section 7(i) exemption for commissioned sales employees of a retail or service establishment. The New Jersey regulations no longer define the administrative exemption 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" – and neither do the FLSA Part 541 regulations. Thus, it appears that New Jersey no longer recognizes an exemption for commissioned inside sales employees at all.

A representative from the New Jersey Department of Labor and Workforce Development has confirmed that this change was inadvertent, and that they are doing everything possible to expedite a fix to the problem. However, because reversing the change will require notice and comment rulemaking, the exemption may be unavailable in New Jersey for six months or more.

Although it is unlikely that the New Jersey Labor Department will begin citing employers for misclassifying commissioned inside sales employees as exempt, employers may soon be facing private lawsuits. Thus, we recommend that any employer relying on the Section 7(i) exemption for New Jersey employees should quickly assess whether such employees continue to remain exempt.

Tammy McCutchen, a Shareholder in Littler Mendelson's Washington, D.C. office, was the primary author of the 2004 revisions to the FLSA Part 541 regulations while serving as Administrator of the United States Department of Labor's Wage and Hour Division. If you would like further information, please contact your Littler attorney at 1.888.Littler, info@littler.com, or Ms. McCutchen at tmccutchen@littler.com.