Your Business May Now Have Greater Flexibility to Claim Employees Paid on a Commission Basis are Exempt from Overtime Pay

 The United States Department of Labor (“DOL”) recently updated its rules regarding the types of businesses that can utilize the exemption for commission-based employees, otherwise known as the 7(i) exemption.  The changes revolve around whether a business qualifies as a retail or service establishment pursuant to the Fair Labor Standards Act (“FLSA”).

Under the FLSA, employers are required to pay non-exempt employees at least the federal minimum wage for all hours worked.  Additionally, employees are entitled to overtime compensation at time and a half for all hours worked in excess of forty (40) per workweek.  However, if an employee is considered exempt under an exemption contained in the FLSA, then the employer is not required to pay the employee overtime for hours worked in excess of forty (40) per workweek.

The 7(i) exemption provides an exemption from overtime for employees of retail or service establishments who are paid primarily on a commission basis.

Specifically, the employee must be paid: (1) at least one and one-half times the federal minimum wage and (2) on a commission basis where more than one half of the employee’s compensation for a representative period must represent commission sales for goods or services. Additionally, the employee must be employed by a retail or service establishment.

The DOL’s new rules now provide greater flexibility for a business to qualify as a retail or service establishment.

A retail or service establishment means an establishment at which seventy-five percent (75%) or more of its annual dollar volume of sales of goods or services, or both, is not for resale and is recognized as retail in the particular industry.  A retail or service establishment is one that has a retail concept.  Characteristics of a retail or service establishment that exhibit a retail concept include:

  • selling goods or services to the general public
  • serving the everyday needs of the community
  • establishments at the end of the stream of distribution
  • disposing of products and skills in small quantities
  • not taking part in the manufacturing process.

Prior to May 19, 2020, the FLSA explicitly provided that specific types of establishments lacked a retail concept and were thus categorically unable to qualify as a retail or service establishment.  Examples of those businesses included loan and credit agencies, dry cleaners, medical and dental offices, law firms, and pharmacies, among many others.  Similarly, the FLSA listed certain types of establishments that may have a retail concept and were potentially eligible to claim the section 7(i) exemption as a retail or service establishment.

As of May 19, 2020, both lists contained in the FLSA were withdrawn.

The DOL will now apply the same analysis to all establishments to determine whether they have a retail concept and qualify as a retail or service establishment.  As a result, establishments that were previously determined not to have a retail concept may now be eligible for the 7(i) exemption.  Therefore, more businesses may be eligible to utilize the 7(i) exemption to avoid paying certain employees overtime for hours worked in excess of forty (40) in a workweek.  In the event an employer now has the ability to utilize the 7(i) exemption, it should also ensure that it meets the compensation threshold requirements previously discussed for commission-based employees.

The rules contained in the FLSA are complex and prove difficult to apply at times.  Contact our employment attorneys Peter Langdon at plangdon@akclaw.com or Harvey Cooper hcooper@akclaw.com to help you navigate the 7(i) exemption and other laws under the FLSA.