New Wage Hour Rule on Retail/Service Exemption

By:   Miriam L. Rosen, McDonald Hopkins PLC

Responding to the COVID-19 crisis has been an all consuming task for employers over the last several months.  As employers now turn their attention to re-opening, it comes with the recognition that back to business also means focusing on employment law compliance.  One  noteworthy recent development is a new Fair Labor Standard Act (FLSA) rule on the retail/service overtime exemption.

New rule of retail and service overtime exemption

The FLSA provides for an overtime exemption, under Section 7(i), for certain employees of retail and service establishments who receive the majority of their compensation on a commission basis. The FLSA defines retail and service employers as “establishments 75 percent 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.”  However, despite that definition, the DOL has long limited the scope of that retail/service exemption by maintaining a narrowly defined list of establishments recognized as “retail” or “service” within the meaning of the FLSA.

On May 8, 2020, the Wage and Hour Division issued a new rule that rescinds 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.   The DOL will now determine an establishment’s retail status by whether it:  “sells goods or services to the general public … and serves the everyday needs of the community in which it is located.”   Further, a retail or service establishment is one that operates at the very end of the stream of distribution, selling in small quantities to an end user and should ordinarily be accessible by the general consuming public.

Use of this “relaxed” standard is an opportunity for employers that provide services directly to consumers, but who were previously excluded from the list to apply the retail/ service exemption. The types of businesses that may now be able to apply this exemption include travel agencies, tax-consulting services, loan and credit agencies, dry cleaners, accountants, medical and dental offices, law firms, pharmacies, and employment agencies.

For a retail or service establishment employee to be exempt from the overtime provisions of the FLSA, the following conditions must still be met:

    1. The employee must be employed by a retail or service establishment;
    2. The employee’s regular rate of pay must exceed 1 1/2  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.

Employers examining all aspects of their operation in response to the COVID-19 crisis should consider whether this updated approach to retail and service establishments impacts their organization and can be incorporated into their compensation strategy.  This analysis should be made in consultation with employment counsel.

This article was written by Miriam L. Rosen, who is Chair of the Legal Affairs Committee of Detroit SHRM and Chair of the Labor and Employment Law Practice Group in the Bloomfield Hills office of McDonald Hopkins PLC, a full service law firm. She can be reached at mrosen@mcdonaldhopkins.com or at (248) 220-1342. Additional articles addressing the many legal and operational concerns impacting businesses as a result of the coronavirus crisis can be found at: https://mcdonaldhopkins.com/Insights/March-2020/Coronavirus-Legal-and-business-concerns

Detroit SHRM encourages members to share these articles with others, inside and outside their organization, as long as its name and logo, and the author’s information, is included in the re-post of the article. May 2020.