The U.S. Department of Labor (DOL) has revised its regulations to simplify the statutory scheme governing whether employees who receive commissions are overtime-exempt. Section 7(i) of the Fair Labor Standards Act (FLSA) allows some retail and service employers to exempt workers who are paid primarily by commission from overtime pay. Only certain types of “retail or service establishments” can take advantage of exemption. Previously, employers had to navigate two outdated regulations, often creating uncomfortable ambiguities. As DOL’s Wage and Hour Division stated in a press release, the new rule “unshackles job creators” by providing “greater simplicity and flexibility to retail industry employers.”

Per DOL guidance, employers must have a “retail concept” to qualify for Section 7(i)’s commission-based overtime exemption. See 29 CFR 779.316. Whether a certain business had a “retail concept” was governed by two lists issued in 1961 and not updated since 1971. The first was a non-exhaustive list of 134 types of businesses that DOL believed lacked a “retail concept,” including travel agencies, stamp redemption stores, and telegraph companies. 29 CFR 779.317. The second was a non-exhaustive list of 76 establishments that “may be recognized as retail,” including coal yards, fur shops, refrigerator servicers, and taxidermists. 29 CFR 779.320. Little explanation was given as to why certain businesses were included or excluded, to the confusion of many. See, e.g. Martin v. The Refrigeration Sch., Inc., 968 F.2d 3, 7 n.2 (9th Cir. 1992) (“the list does not appear to flow from any cohesive criteria for retail and non-retail establishments”). Additionally, many of the business types listed were obsolete and emerging business models were left in the dark. The difficulty in determining whether certain businesses had a “retail concept” caused many employers to avoid the Section 7(i) exemption altogether.

The new final rule withdraws these two lists, effective immediately. Now, the same analysis applies to all businesses equally and does not single out any types for inclusion or exclusion. Employers can instead look to DOL’s remaining regulations on what constitutes a “retail or service establishment.” The main rule on this topic describes characteristics of such businesses, including that the establishment: “is at the very end of the stream of distribution,” sells various items to the general public or provides services to the general public, serves the everyday needs of the community, and does not take part in the manufacturing process. 29 CFR 779.318. Other regulations require that “75 percent of the establishment's annual dollar volume must be derived from sales of goods or services (or of both),” and that the business not derive more than 25 percent of its annual revenue from wholesale transactions. 29 CFR 779.322, 327.

Removing the lists opens the Section 7(i) commission-based overtime exemption to any business meeting these characteristics. But retailers must also comply with two more requirements before implementing the exemption. First, in any week where the employee works overtime, her regular pay must exceed 1.5 times minimum wage for every hour worked. Second, more than half of the employee’s total compensation during a representative period must come from commissions. 29. USC § 207(i). Unless all three requirements are met (retail or service business; 1.5 times minimum wage; and majority of pay from commissions), the employer must pay overtime for all hours worked over 40 in a particular week. As with any other wage-and-hour issue, accurate recordkeeping is essential when asserting the Section 7(i) overtime exemption. DOL’s rule change should provide retail employers greater flexibility when structuring their commission and compensation programs.

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