By Brian Mosby and Rebecca Loeffler
On April 3, Indiana Gov. Eric Holcomb signed Senate Enrolled Act 231, excluding a direct seller from the definition of “employee” under the state’s minimum wage law (Indiana Code § 22-2-2 et. seq.) and from the definition of “employment” under the state’s unemployment compensation system (I.C. 22-4 et. seq.), except under certain conditions. The law took effect July 1.
Under these new exemptions, a “direct seller” is a person in the trade or business of selling, or soliciting the sale of, consumer products or services to any buyer on a buy-sell basis, deposit-commission basis, or similar basis, in any place other than in a permanent retail establishment; or selling, or soliciting the sale of, consumer products or services in any place other than in a permanent retail establishment:
• When substantially all the remuneration, whether or not paid in cash, for the performance of the services is directly related to sales or other output, including the performance of services, rather than the number of hours worked, and;
• When the services performed by the person are performed pursuant to a written contract and the contract provides that the person who performs the services will not be treated as an employee for tax purposes under the contract.
Impact on minimum wage law
Similar to the Indiana Civil Rights Law, the Minimum Wage Law of 1965 was enacted to cover gaps in protection by federal laws. It specifically exempts from the definition of “employer” any employer who is subject to the minimum wage provisions of the federal Fair Labor Standards Act of 1938, as amended. The FLSA applies to employers whose annual sales total $500,000 or more or who are engaged in interstate commerce. While this may appear to restrict the FLSA to covering only employees in large companies, the FLSA actually covers nearly all workplaces. Further, the FLSA also automatically covers some businesses, such as schools, hospitals, nursing homes or other residential care facilities, as well as all governmental entities (regardless of the level of government), no matter how big or small.
Given the breadth of the FLSA’s coverage, most Indiana employers and employees are covered by the minimum wage and overtime provisions of the FLSA. The FLSA exempts from its minimum wage and overtime requirements those employees who are properly classified as outside salespeople. Under the FLSA, an outside salesperson is someone whose primary duty is making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and who is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty. The FLSA also contains an exemption from its minimum wage and overtime requirements for certain employees of retail or service establishments.
However, the FLSA may not cover truly local businesses, those which source all products and services within Indiana’s borders and have sales under $500,000. The employees of these small local businesses may not be entitled to the minimum wage or overtime pay under the FLSA. For example, a local landscaping company whose employees buy all necessary business supplies from the local garden center or office supply store and who otherwise never leave the state are not engaged in interstate commerce. Their retail purchases of materials and supplies through local stores will not trigger coverage, even though the stores might have had the supplies shipped in from out of state. However, those not covered under federal law may still be covered by the Indiana minimum wage law.
Indiana’s minimum wage law contains exemptions to its minimum wage and overtime requirements similar to those found in the FLSA. Specifically, similar to the FLSA’s outside sales exemption, Indiana’s minimum wage law excludes from the definition of “employee” individuals who are “employed as insurance producers, insurance solicitors, and outside salesmen, if all their services are performed for remuneration solely by commission” and certain retail and service establishment employees.
In addition to establishing the state minimum wage (equal to that set under the FLSA), Indiana’s minimum wage statute also prohibits pay discrimination on the basis of sex, provides for payment at the rate of 1 ½ the standard rate as overtime compensation and establishes procedures for tip credits. Further, every employer subject to the Indiana minimum wage law is required to furnish each employee a statement of the hours worked by the employee, the wages paid to the employee and a listing of the deductions made. All Indiana employers, whether covered by the Indiana minimum wage law or the FLSA, must pay employees all earned wages within 10 business days of the end of the pay period.
The purpose of Indiana’s unemployment compensation system is to provide protection to workers who have become unemployed through no fault of their own by providing short-term cash assistance to those workers who qualify for benefits. In general, a business is considered an employer and is required to open a state unemployment account if it meets one of the statutorily defined criteria, which are extremely broad. Almost all entities that compensate an individual for the performance of services in Indiana will fit under one of the criteria.
While almost all employers would be covered under Indiana’s unemployment compensation system, there is a long list of services excluded from the definition of “employment” under Indiana law which would prevent individuals from qualifying for benefits. For example, and similar to the minimum wage statute, Indiana’s unemployment compensation system already excludes independent contractors and those engaged in commission-based sales. (I.C. 22-4-8 et. seq.) Based on this recent amendment to I.C. 22-4-8-3, services performed by a direct seller (if not already excluded) will no longer qualify as “employment” in determining whether an individual qualifies for unemployment benefits.
As independent contractors and those engaged in commission-based sales were already excluded from the definitions of employee and employment under both the minimum wage law and unemployment compensation system, it is likely that the majority of direct sellers were already excluded from both the minimum wage law protections and unemployment compensation insurance coverage under those exemptions. Indeed, the legislative notes for the bill indicate the expected practical impact of the new legislation will be minimal for the Indiana employer and employee. The intent of the new provision is to make less work for the Indiana Department of Labor and Department of Workforce Development, who oversee the Indiana minimum wage law and unemployment compensation systems. The purpose of the new provision is likely intended to make it easier for those agencies to screen out frivolous claims. However, it is yet to be determined if there will be any additional impact of the amendment.•
• Brian Mosby is a shareholder and Rebecca Loeffler is of counsel at Littler in Indianapolis. Opinions expressed are those of the author.