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DOL Issues New Rule Clarifying Overtime Exemption for Retail and Service Employees

The Fair Labor Standards Act (FLSA) provides an overtime exemption to employees of retail and service establishments if paid wholly or in part on a commission basis. The Department of Labor’s Wage and Hour Division defines a retail and service establishment as one that is recognized as a retail or service sales organization in which 75% of its annual dollar sales volume is not for resale.

On May 19, 2020, the Department of Labor (DOL) issued a new ruling, which withdraws the lists of establishments that were previously deemed as having “no retail concept” or potentially having a retail concept as defined in Section 7(i) of the FLSA. Under the new ruling for a retail or service establishment to be exempt from the overtime provisions of the FLSA for its commissioned employees, three conditions need to be met:

  1. The employee must be employed by a retail or service establishment;
  2. The employee’s regular rate of pay must exceed one and one half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked; and
  3. More than half of the employee’s total earnings in a representative period must consist of commissions.

With the initial ruling issued back in the 1960s, the DOL established two lists of establishments – those lacking a “retail concept” and those that may be recognized as having a “retail concept.” The DOL defines “retail concept” as an establishment that sells goods or services, services the community, receives distribution, and does not manufacture goods.

The new ruling essentially withdraws the two categorical lists of establishments, and the same rules and analysis will apply uniformly to all establishments in determining whether they qualify as a retail or service establishment. The two categories of establishments have long been an issue as many federal courts felt the lists were too arbitrary and analysis was still required to determine if an establishment met the retail or service criteria. The final ruling was made to promote consistency in the application of overtime criteria to all employees. The overall overtime exemption criteria established under the FLSA is not changing.

Employers should review their commissioned employee’s exemption status under this new ruling and make adjustments where necessary.

For additional insights on how to navigate evolving compliance and compensation requirements during the COVID-19 (coronavirus) pandemic, visit the OneDigital Coronavirus Advisory Hub, or reach out to your local OneDigital advisory team.