- The U.S. Department of Labor (DOL) expanded an overtime exemption May 19, withdrawing two lists of establishments previously deemed ineligible or potentially ineligible for an exemption.
- The FLSA's Section 7(i) overtime exemption permits certain retail and service establishments to avoid paying overtime to employees paid on a commission basis in whole or in part. Federal regulations adopted in 1961 outlined a partial list of establishments that lack a "retail concept" and were therefore unable to claim the Section 7(i) exemption, as well as a separate list of establishments that "may be recognized as retail." In the May 19 final rule, DOL withdrew these lists in favor of a "generally applicable analysis" that "is better suited to account for developments in industries over time regarding whether they are retail or not."
- The rule took effect immediately.
The eligibility criteria for the FLSA's Section 7(i) overtime exemption haven't changed, sources told HR Dive, but the final rule could bring more consistency to DOL's application of that criteria.
"The criteria to qualify for the exemption remain the same," Susan Harthill, partner at Morgan Lewis and former deputy solicitor for national operations at DOL, said in an email. "What has changed is that DOL and the courts are no longer bound by the categorical lists — DOL can take a fresh look at any establishment and apply the existing criteria, taking into account new business realities and the way that services are delivered in the modern world."
The final rule is a "huge change" affecting several categories of businesses, including travel agencies and staffing agencies, Dane Steffenson, special counsel at Littler Mendelson and former senior trial attorney at DOL, told HR Dive in an interview. But he noted that the agency's regulations could still prevent other types of employers, like insurers, from qualifying.
"There's still this large group of employers that have traditionally not had a retail concept," Steffenson said. "It seems that's still a piece that sort of contradicts what the DOL is saying."
Establishments previously considered by DOL as lacking a retail concept — a long list that includes airports, banks and dentists' offices among others — should consult with counsel regarding whether DOL or a reviewing court could apply the agency's criteria differently, Harthill said. Such employers may also consider seeking an opinion letter from DOL, she added.
A retail or services sector employer seeking to use the Section 7(i) exemption for commissioned employees must meet three conditions, according to a DOL fact sheet:
- The employee must be employed by a retail or service establishment.
- 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.
- More than half the employee's total earnings in a representative period must consist of commissions.
Unless all three conditions are met, the exemption is not applicable and the employer must pay overtime for all hours worked beyond 40 in a workweek at time and one-half the employee's regular rate of pay, according to DOL.
More generally, HR departments might need to take "a fresher look" at whether any of their establishments could fall into the definition of a retail concept before deciding to reclassify employees, according to Harthill. "A robust wage and hour audit is prudent because the circumstances for commissioned sales employees differ and, like all the FLSA exemptions, this is a fact-based inquiry with multiple criteria," she said. "They should also consider whether the states where employees are located impose different or additional requirements."