The Employer’s Wage and Hour Advisor

Overtime Exemption for Certain Commissioned Employees

While covered employers are generally required to pay overtime compensation for time worked over 40 hours per workweek, Section 7(i) of the FLSA provides an exemption from this overtime pay for certain employees of retail or service establishments.  To qualify for the exemption, the employee’s regular rate of pay must be in excess of 1.5 times the minimum wage and the employee must receive more than half his compensation from commissions on goods or services for a representative period.  Rather than listing specific industries that do not qualify or may qualify, the regulation now lists the following characteristics of retail or service establishments:

1. Selling goods or services to the general public;
2. Serves the everyday needs of the community in which it is located;
3. Works at the very end of the distribution stream, disposing of small quantities of products or skills of the organization; and
4. Does not take part in the manufacturing process.

The regulation also provides an illustrative list of establishments that provide retail or service, such as:

• Grocery stores;
• Hardware stores;
• Clothing stores;
• Coal dealers;
• Furniture stores;
• Restaurants;
• Hotels;
• Watch repair establishments; and
• Barber shops.

On the other hand, establishments lacking a “retail concept” do not qualify as a “retail or service establishment” and, therefore, their employees cannot qualify as exempt even if they meet the compensation criteria.  The regulations provide two examples of such businesses—namely, an electric power company and transactions of an insurance company.

Withdrawing the Prior Provisions and the Effect on Businesses

The prior regulations contained two lists: one indicating industries that had “no retail concept” and one indicating industries that “may be recognized as retail.”  While there is little impact on those businesses that may have been recognized as retail, industries on the “no retail concept” list are now able to review whether they do have a retail concept and can ultimately rely on the retail sales exemption, if appropriate.  Businesses included on the original “no retail concept” list included, among others:

• Advertising agencies;
• Apartment houses;
• Building contractors;
• Employment agencies;
• Investment counseling firms;
• Loan offices;
• Newspaper and magazine publishers;
• Painting contractors;
• Real estate companies;
• Special trade contractors in the construction industry; and
• Trade associations.

Notwithstanding the above, industry-specific case law has developed over the years regarding this exemption.  It is unknown at this time what level of discretion courts will give to these interpretive changes.

Employers wishing to review the status of their employees under the new final rule should consult with legal counsel to discuss whether the retail sales exemption applies to their business.