DOL Issues New Rule Clarifying Overtime Exemption for Retail and Service Employees

Section 7(i) of the Fair Labor Standards Act (FLSA) provides an exemption from the FLSA’s overtime pay requirement for certain employees of retail or service establishments paid primarily on a commission basis. Based on prior FLSA language, WHD defines a “retail or service establishment as “an establishment 75 per centum of whose annual dollar volume of sales of goods or services (or both) is not for resale and is recognized as retail sales or services in the particular industry.”

The rule withdraws two provisions from WHD’s regulations. The first withdrawn provision listed industries that WHD viewed as having “no retail concept” and thus were categorically ineligible to claim the section 7(i) exemption. The second withdrawn provision listed industries that, in WHD’s view, “may be recognized as retail” and thus were potentially eligible for the exemption. As the rule explains, some courts have questioned whether these lists lack any rational basis.

According to WHD, “as a result of the withdrawal of these two lists, establishments in industries that had been on the non-retail list may now assert that they have a retail concept, and if they meet the existing definition of retail and other criteria, may qualify to use the exemption.” The other criteria include paying a regular rate at least one and a half times the minimum wage and providing commissions that comprise more than half of the employee’s compensation for a representative period.

WHD observed that “some establishments on the withdrawn non-retail list may have been deterred from availing themselves of the exemption and its compensation flexibilities. If establishments on the withdrawn non-retail list now qualify for the exemption, they have added flexibility regarding commission-based pay arrangements with their workers.” For these employers and workers, WHD said they could consider whether, for instance, more commission-based pay is sensible.

WHD also noted that establishments in industries that had been on the “may be” retail list may continue to assert that they have a retail concept. Moving forward, WHD will apply the same analysis to all establishments to determine whether they have a retail concept and qualify as retail or service establishments, promoting greater clarity for employers and workers alike.  According to WHD, the rule “is intended to promote consistent treatment across all industries and reduce confusion when determining eligibility for claiming the section 7(i) exemption.”

WHD issued this rule without notice and comment, and it will take effect immediately. According to WHD, “[n]otice and comment and delaying the effective date are not required because both lists being withdrawn were part of WHD’s interpretive regulations and were originally issued in 1961 without notice and comment or a delay.”