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The Fair Labor Standards Act allows employers in retail and service establishments to exempt certain employees paid primarily on a commission basis from overtime. Recently, the Department of Labor issued a final rule clarifying the application of this exemption. Retail and service establishments are defined as establishments 75% 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. Generally, to be a retail or service establishment, the employer must have a “retail concept,” meaning the employer sells 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 in small quantities their product and skills, and does not take part in the manufacturing process.

Prior to this change, the regulations listed specific industries that the Department of Labor viewed as having “no retail concept.” These regulations caused establishments in these listed industries to be categorically ineligible to claim the exemption. The regulations also listed establishments that, in the Department of Labor’s opinion, “may be recognized as retail,” which were potentially eligible for the exemption. With a few exceptions, the regulations provided no explanation for why certain industries were included on either of these lists. Many courts and employers questioned the reasoning behind the lists, with one federal circuit court of appeals describing the list as an “incomplete, arbitrary, and essentially mindless catalog.” The regulations thus caused employers with legitimate retail and service establishments to not be able to avail themselves of the overtime exemption merely because their industry was included on a list as having “no retail concept.”

Recognizing this issue, the Department of Labor issued a final rule on May 18, 2020 (to take immediate effect) withdrawing the two lists in the regulations. As a result, establishments in industries that had been listed as having “no retail concept” may now assert that they have a retail concept and, if they meet the existing requirements for the exemption, may qualify for the exemption. The establishments that previously had “no retail concept” included various industries, such as dry cleaners, tax preparers, laundries, roofing companies, travel agencies, blue printing and photostating establishments, stamp and coupon redemption stores, and telephone companies. The Department of Labor will now apply one analysis to all establishments, thus promoting greater flexibility for employers and workers and consistent treatment for purposes of qualifying for the exemption. As the Wage and Hour Division Administrator explained, “this final rule unshackles job creators in the retail space who had previously been categorically excluded from the exemption.”

The Department of Labor’s recent clarification does not impose any new requirements or affirmative measures in order to meet the exemption. In order to qualify for this exemption, the regular rate of pay of the employee must exceed one and half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked. In addition to this, more than half the employee’s compensation must represent commissions on goods and services. Further, the employee must be employed by a retail and service establishment as defined above.

If you have any questions regarding the exemption for retail and service establishments, please contact a member of Koley Jessen’s Employment Group.

^{Special thanks to our Summer Associate, Jake Walker for his help in writing this article.}