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U.S. Department of Labor Issues Final Rule on Retail and Service Establishment Overtime Exemption

Introduction

The Fair Labor Standards Act of 1938 (“FLSA”) is a federal law that establishes minimum wage, overtime pay, recordkeeping, and youth employment standards that affect employees in the private sector and in federal, state, and local governments. Since its enactment, the FLSA has seen many interpretations, changes, and amendments, as current events and various societal factors have impacted its provisions. Recently, the Department of Labor (“DOL”) issued a Final Rule to simplify the retail and service establishment exemption.

The Retail and Service Establishment Overtime Exemption

The FLSA generally requires covered employers to pay nonexempt employees overtime compensation for time worked in excess of 40 hours per workweek. However, the FLSA includes an exemption for retail and service industry employers where employees are paid primary on a commission basis. An employee comes within this exemption when (1) the regular rate of pay is in excess of one and one-half time the FLSA’s minimum wage requirement and (2) more than half of the employee’s compensation represents commissions on goods or services. Additionally, the employee must be employed by a retail or service establishment. The FLSA defines a retail or service establishment as “an establishment 75 per centum 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.”

The DOL has interpreted “retail or service establishment” as requiring the establishment to have a “retail concept.” A “retail concept” includes the sale of goods or services to the general public, as well as the service of everyday needs in the community. To be a “retail concept” these sales or services must generally (1) take place at the very end of the stream of distribution; (2) dispose of the products and skills in small quantities; and (3) not take part in the manufacturing process.

Types of establishments deemed as lacking a “retail concept”

In 1961, the DOL published a non-exhaustive list of 89 types of establishments that it viewed as lacking a “retail concept.” Again, in 1970, the DOL added 45 more types of establishments that it deemed lacking a “retail concept.” The list was included as an interpretive rule. The non-retail list included establishments from a variety of industries, including dry cleaners, tax preparers, laundries, roofing companies, travel agencies, blue printing and photostating establishments, stamp and coupon redemption stores, and telegraph companies.

Also, in 1961, the DOL issued a non-exhaustive list of 77 types of establishments that “may be recognized as retail.” This list included establishments in the industries of coal yards, fur repair, household refrigerator service and repair shops, piano tuning establishments, scalp-treatment establishments, reducing establishments, and taxidermists. In 1971, the DOL removed “valet shops” from the list of establishments that “may be recognized as retail.” Despite the foregoing, the DOL has provided very little explanation for how it interprets which establishments are deemed “retail” or not.

The withdrawal of “no retail concept” and “may be recognized as retail concept” lists

On Tuesday May 19, 2020, the DOL withdrew the “no retail concept” list and the “may be recognized as retail” list. The DOL will now apply a uniform analysis to all types of establishments when determining whether or not it has a “retail concept.” By applying the same analysis to all types of establishments, the DOL will now promote consistent treatment for purposes of the retail and service industry exemption under the FLSA. The courts have routinely questioned the reasoning behind the original lists.

By withdrawing these two lists, establishments previously on the “no retail concept” list may now assert that they have a retail concept, and thus qualify for the exemption. However, they must meet the existing definition of retail and other criteria. Conversely, establishments previously on the “may be recognized as retail list” may continue to assert that they have a retail concept, but they will be subject to the same analysis as other types of establishes not included on the original list. By allowing all types of establishments to potentially qualify for the exemption, employers and employees alike will enjoy greater simplicity and flexibility regarding overtime pay.

If you feel your rights under the Fair Labor Standards Act have been violated, or if you have any questions regarding your employment rights, please contact the experienced Birmingham employment law attorneys at Wrady Michel & King. You can contact us online or by calling us at (205) 319-9724.