On May 18, 2020, the Wage and Hour Division of the U.S. Department of Labor (DOL) announced a new final rule to govern the determination of whether an employer qualifies as a “retail or service” establishment for purposes of applying an overtime exemption to commission-based employees.

Section 7(i) of the Fair Labor Standards Act (“FLSA”) provides an overtime exemption specifically for certain employees paid commissions by retail establishment employers.  To qualify for the overtime exemption, (1) the employee must be employed by a “retail or service” establishment; (2)  he or she must earn a wage of at least one and one-half times the minimum wage (currently $7.25)”;[1] and (3) for a representative period, more than half the employee’s compensation must be comprised of commissions.

The new rule eliminates two partial lists of establishments that the DOL categorized as either completely lacking any “retail concept” or as potentially or presumptively possessing some “retail concept.” The DOL issued these two lists in 1961 as part of informal guidance from the agency for interpreting and applying the Section 7(i) overtime exemption. For the past fifty-plus years, these two lists served to categorically deny the exemption to several businesses while creating confusing litigation scenarios for the courts.  The decision to withdraw these lists opens the door for several employers to assert that they have a retail concept and qualify for overtime exemptions for their commission-based employees, assuming these employers meet the definition of retail concept and the other exemption criteria.

Among the many employers who may now attempt to qualify for the Section 7(i) exemption under the new final rule are banks, employment agencies, laundries, plumbing companies, roofing companies, security dealers, travel agencies, and tax preparers. Going forward, all employers seeking to take advantage of the Section 7(i) exemption will be subject to the same legal test of whether they have a retail concept and qualify as a retail or service establishment.

The new final rule became effective immediately upon the DOL’s announcement.  

[1] Virginia’s minimum wage will increase to $9.50/hour on May 1, 2021.