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DOL Issues New Final Rule on Retail or Service Establishment Overtime Exemption

On May 19, 2020, the United States Department of Labor issued a new final rule that overhauls its 60-year old regulatory guidance on the types of industries that fall within the “retail or service establishment” overtime exemption.  The change may result in more employers being able to take advantage of this exemption.

Under Section 207(i) of the FLSA, an employer who mets the definition of a retail or service establishment  is excused from paying overtime to an employee who meets certain requirements.  According to the WHD’s Fact Sheet #20, for an employer to qualify for the exemption, three conditions must be meet:

  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 the employee’s total earnings in a representative period must consist of commissions.

One of major obstacles to applying this exemption is the definition of “retail or service establishment.”  The statute and regulations define it as “establishments 75% of whose annual dollar volume of sales of goods or services (or of both) is not for resale and is recognized as retail sales or services in the particular industry.” In 1961 (the year I was born!), the DOL issued a non-exhaustive list of 89 establishments that it viewed as “lacking a retail concept.”  The list, published at 29 CFR 779.317, included industries such as tax preparers, travel  agencies, telegraph companies, and “stamp and coupon redemption stores.” At the same time, the DOL issued a list of establishments that “may be recognized as retail” at 29 CFR 779.320.  This list included industries such as coal yards, fur repair and  storage shops, taxidermists, scalp treatment establishments, and piano-tuning establishments.

Over the years, the odd collection of industries on the two lists led to lots of confusion as to how to apply the exemption. As one court commented, the list in an “incomplete, arbitrary, and essentially mindless catalogue.” Alvarado v. Corp. Cleaning Services, Inc., 782 F. 3rd 365, 371 (7th Cir. 2015).  As a result, in its May 19th final rule, the DOL announced it is withdrawing the lists of establishments  in §§ 779.317 and 320.  The result is that a business may now meet the requirements for the exemption if they satisfy the requirements of FLSA Section 207(i) and 29 CFR 779.318.  Under that regulation, a retail or service establishment is defined  simply as “one which sells goods or services to the general public.” As further explained in the regulation:

It serves the everyday needs of the community in which it is located. The retail or service establishment performs a function in the business organization of the Nation which is at the very end of the stream of distribution, disposing in small quantities of the products and skills of such organization and does not take part in the manufacturing process.

The new final rule should prompt employers to review their workforces and see if they may take advantage of this exemption.  If an employer has commissioned employees on its payroll, it is well worth the time to look at the requirements of Section 207(i) and consider whether it applies to those employees.

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