The U.S. Department of Labor Clarifies Application of the Retail or Service Commission Sales Exemption under the FLSA

On June 25, 2020, the U.S. Department of Labor (“DOL”) issued a new opinion letter regarding the retail or service commission sales exemption from the Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 207(i). The opinion letter was written in response to a request from a company involved in the retail sale of home furnishings seeking guidance concerning application of the overtime exemption for a retail or service establishment. The DOL determined an employer may use the overtime exemption only if commissions constitute more than half of compensation for any representative period (not less than one month) for a new employee.

Factual Background

The company was involved in the retail sale of home furnishings to the public in small stores employing 2-5 employees. Most salespersons have substantial earnings through commissions most of the time. However, sometimes it is clear a salesperson will not earn substantial commissions; when this happens, the company pays an employee on an hourly basis with overtime premium pay.

The company sought guidance from the DOL to know when and how it could use the retail or service commission sales exemption from the FLSA for new sales employees. Specifically, the company was concerned with two scenarios: (1) the opening of a new store where the sales volume is unknown; and (2) the hiring of a new salesperson with no sales performance record.

The company hired salespersons in these situations as commissioned employees subject to the retail or service commission sales exemption. The company also guaranteed compensation at one and one-half times the applicable minimum wage for all hours worked during a representative period.

The company tracked sales and commissions, but employees only met the commissions requirement in some workweeks. The company was having difficulty determining whether more than half of the compensation received by the new salesperson by the end of the full representative period would consist of sales commissions at the end of the representative period.

Analysis

The FLSA retail or service commission sales exemption applies if: (1) the employee is employed by a retail or service establishment; (2) the employee’s regular rate of pay exceeds one and one-half times the minimum hourly rate; and (3) more than half of the employee’s compensation for a representative period (not less than one month) consists of commissions on goods and services. 29 U.S.C. § 207(i); 29 C.F.R. § 779.412.

The DOL first noted that nothing in the FLSA prohibited an employer from using a representative period for a new employee or new store simultaneously with using the Section 7(i) exemption. The DOL next analyzed a 1981 DOL opinion letter to reach the same conclusion. However, based on this prior DOL opinion letter, the DOL noted the employer must pay an overtime premium for any overtime hours worked during the representative period if, at the conclusion of this period, the commissions do not constitute more than half of compensation. Nonetheless, the DOL noted the employer could again attempt to establish a representative period for the new employee and simultaneously claim the exemption for that employee on a prospective basis, subject to the same rule.

Takeaway

An employer can prospectively apply the retail or service commission sales exemption to a new employee so long as that employee earns commissions totaling more than half of his compensation during a representative period not less than one month. If the employee does not earn the required amount of commissions during this period, then that employee must be paid an overtime premium for those hours worked in excess of forty (40) per workweek during that period.

If you have an issue or questions concerning the retail or service commission sales exemption from the FLSA, please contact the Dolley Law, LLC by phone at (314) 645-4100 or email at kevin@dolleylaw.com.

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