Modernizing the FLSA: DOL Gives the 7(i) Exemption a Makeover

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Snell & WilmerSection 7(i) of the Fair Labor Standards Act (FLSA) provides an often overlooked, but useful, exemption to an employer’s overtime obligations for certain commission-based employees of retail and service establishments. However, to claim the exemption, employers must first determine: are they a “retail or service establishment?" 

Since 1961, the answer to this question was often determined by an “incomplete, arbitrary and essentially mindless catalog” of establishments that the U.S. Department of Labor (DOL) categorized as either qualifying (or not) as retail or service establishments. See Alvarado v. Corporate Cleaning Services, Inc., 782 F.3d 365, 371 (7th Cir. 2015). On May 19, 2020, the DOL provided a much-needed update to Section 7(i). Now, employers will be evaluated under a single analytical framework without the burden—or benefit—of being included on the DOL’s lists.

Section 7(i) Exemption

Section 7(i) provides that an employer is not required to pay overtime to an employee of a retail or service establishment so long as the (i) the regular rate of pay of such employee is in excess of one-and-one-half times the minimum hourly rate; and (ii) more than half the employee’s compensation for a representative period of not less than one month represents commissions on goods or services. See 29 U.S.C. § 207(i).

Who exactly qualified as a retail or service establishment became the threshold question for employers seeking the exemption. In 1961, the DOL issued interpretative guidance regarding retail or service establishments. The guidance included a lengthy, but non-exhaustive, list of establishments “to which the retail concept does not apply.” The DOL updated the list in 1970, bringing the total number of establishments likely lacking a retail concept to 134, including: dry cleaners; accounting services, banks, credit and loan agencies, tax preparers; plumbing, HVAC, building contractors, and construction contractors; travel agencies; and sellers of machinery and equipment (including, curiously, sellers of “undertaker equipment”). See 29 CFR § 779.317.  At the same time, the DOL issued another non-exhaustive list, this time detailing 77 types of establishments that may be recognized as retail, including auto dealers, car washes and repair shops; appliance, hardware, fur, jewelry, and shoe repair shops; restaurants, hotels, and tourist homes; and (notably) undertakers. See 29 CFR § 779.320.

These lists left many employers—and courts—scratching their heads. Were employers automatically exempt, or non-exempt, if their business was included in either list? Or were the lists only guiding principles? The confusion led the Ninth Circuit to expressly blast the DOL and its failure to provide appropriate guidance, noting there was “no generating principles” underlying the lists and that the lists did “not appear to flow from any cohesive criteria for retail and non-retail establishments.” Martin v. The Refrigeration Sch. Inc., the Ninth Circuit 968 F.2d 3, 7 n.2 (9th Cir. 1992). See also Alvarado, 782 F.3d at 371 (7th Cir. 2015) (noting the list of establishments lacking the retail concept “goes on and on” but offers “no explanation for the choice of which firms to describe as lacking a retail concept”).

The divisive, and seemingly random, nature of the lists caused some courts to abandon them altogether; others remained persuaded by their organizing principles. Compare Reich v. Cruises Only, Inc., 1997 WL 1507504 at *4–5 (M.D. Fla. June 5, 1997) (holding that a travel agency specializing in cruise vacations possessed a retail concept despite the fact that § 779.317 listed travel agencies as lacking a retail concept, concluding that the regulation “appear[ed] to be arbitrary and without any rational basis explained in the regulation[]”)) with English v. Ecolab, Inc., 2008 WL 878456 at *9–15 (S.D.N.Y. Mar. 28, 2008) (comparing the employer’s business of providing commercial pest control, while on neither list, to the DOL’s guidance and finding that the employer qualified as a retail or service establishment). Left without clear guidance, many employers decided to forgo the entire exemption.

DOL Withdraws Lists; Now, Single Analysis Applies to All Retail and Service Establishments

On May 19, 2020, the DOL finally provided some clarification. Effective immediately—as of May 19, 2020—the DOL has withdrawn both lists and, going forward, will subject all establishments to the same standard. See DOL News Release; the updated rule can be viewed here

The change imposes no new requirements and the definition of retail or service establishment remains unchanged: “an establishment 75 per centum of whose annual dollar volume of sales of goods or services (or of both) is not for resale and is recognized as retail sales or services in the particular industry.” 29 CFR § 779.411. In addition, a retail or service establishment sells its goods or services to the general public, serves the everyday needs of the community, is at the very end of the stream of distribution, disposes its products and skills “in small quantities,” and “does not take part in the manufacturing process.” 29 C.F.R. §779.318(a).  

The DOL’s withdrawal of the lists should allow businesses to be treated consistently by using a single analysis. Businesses previously deemed ineligible for the exemption may want to review the nature of their business and their employees’ compensation to determine if their business qualifies for the exemption. Businesses currently claiming the exemption should also consider reviewing the nature of their business and ensuring they still fit the DOL’s remaining interpretive guidance. Although they may still qualify for the exemption, there is no longer a presumption they are a retail or service establishment. Employers may want to reach out to their attorneys to discuss these issues and help make sure their business are in compliance.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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