The Federal Department of Labor Eliminates Categorical Exclusions From the Retail Concept Requirement of FLSA’s Overtime Compensation Exemption

The Wage and Hour Division of the United States Department of Labor (the “DOL”) withdrew Sections 779.317 and 779.320 from the Fair Labor Standards Act (“FLSA”) which categorically excluded certain businesses from the retail sales exemption for payment of overtime compensation under Section 7(i). 

Section 7(i) of the FLSA relieves employers in retail and service industries from the obligation of paying overtime compensation to certain employees paid primarily by commissions.

In order for an employee to satisfy the exemption, several requirements must be met.  First, the employee’s regular rate of pay must be one and one-half times the federal minimum wage.  Second, more than half of the employee's compensation must represent commissions on goods or services.  Third, the employee must be employed by a retail or service establishment as defined in section 13(a)(2).  29 U.S.C. 207(i); 29 CFR 779.312. 

The DOL defined “retail or service establishment” to include those establishments with a “retail concept.”  The “retail concept” required the retail or service establishment to sell goods or services to the general public; serve the everyday needs of the community; be at the very end of the stream of distribution; dispose its products and skills in small quantities; and not take part in the manufacturing process.  

More than 70 years ago, the DOL established 29 C.F.R. section 779.317 which included a “non-retail list” that specifically excluded establishments in various industries which did not qualify for the “retail concept” distinction.  The list excluded establishments such as dry cleaners, tax preparers, laundromats, roofing companies, travel agencies, blue printing and photostating establishments, stamp and coupon redemption stores, and telegraph companies.  Since these businesses could not meet the exemption criteria, they were not eligible to claim the section 7(i) exemption. 

Section 779.320 featured a “maybe” retail list which identified businesses that “may” meet the “retail concept” requirement.  This list included coal yards, fur repair and storage shops, household refrigerator service and repair shops, masseur establishments, piano tuning establishments, reducing establishments, scalp-treatment establishments, and taxidermists.  The DOL provided no explanation as to why any of the listed industries were included on this list.

To account for developments in industries over time and taking into consideration statements of various court decisions which questioned the reasoning behind the lists, the DOL eliminated the static “non-retail” and the “maybe” retail lists to allow establishments which had previously been excluded the opportunity to qualify as retail or service establishments.  Accordingly, the Department will now treat all businesses equally and apply one analysis to all establishments for purposes of the section 7(i) exemption.  

What this means for employers

This is one of those unique areas where federal law was more restrictive than California.  Now that the federal rule has been relaxed, more California employers may meet the “retail concept” requirement and utilize the retail sales exemption from overtime for commissioned employees. 

Under California law, commissioned employees who earn more than fifty percent (50%) of their total compensation from commissions, and who earn more than one and one half times (1.5x) the minimum wage are exempt from overtime.  See IWC Wage Order No. 4, Section 3(D).  Wage Order 4 applies to the professional, technical, clerical, mechanical, and similar occupations.  Wage Order 7 applies to the mercantile industry.

If you have any questions as to whether your business meets the “retail concept” requirement for the exemption from the payment of overtime compensation under FLSA and California law, please contact the authors or your usual employment law counsel at AALRR.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

©2020 Atkinson, Andelson, Loya, Ruud & Romo

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