Labor Department Eases Retail Sales Overtime Exemption

On May 18, 2020, the Department of Labor issued a final rule eliminating certain restrictions on businesses seeking to take advantage of the retail or service establishment exemption of the Fair Labor Standards Act (“FLSA”).

Businesses that were previously categorically disqualified for the exemption under the regulations are now able to prove that they have a “retail concept” under the FLSA and therefore can treat certain of their employees as exempt from overtime.

Retail Exemption  Defined

The FLSA exempts retail and service establishments from paying overtime to those employees who are paid primarily on commissions. But what exactly is a retail and service establishment? The FLSA uses the following ambiguous and somewhat circular standard: “an establishment 75% of whose annual dollar volume of sales of goods or services (or both) is not for resale as is recognized as retail sales or services in the particular industry.”

The DOLs regulations are a little more helpful, specifying that such establishments must have a “retail concept”, which means they usually “sell goods or services to the general public,” “serve[] the everyday needs of the community,” are “at the very end of the stream of distribution” and do “not take part in the manufacturing process.”

Old Categories Dropped

Until today, the DOL regulations contained a list of 89 types of businesses said to have “no retail concept.” The types of businesses on this list were therefore ineligible to claim the retail or service establishment exemption to the FLSA’s overtime requirement. This list – which included banks, insurance brokerages and offices, real estate companies, and tax services – was lengthy but non-exhaustive. From now on, these types of business – and all others – may assert that they do in fact have a retail concept and are therefore able to qualify as retail or service establishments under the FLSA.

Interestingly, the regulations also maintained a separate, non-exhaustive list of establishments that “may be recognized as retail.” The businesses on this list – such as piano tuning-establishments, fur repair and storage shops, and scalp-treatment establishments, among other curious business types – were potentially eligible for the retail and service exemption. Today’s final rule also retracts this list, which means that these enterprises will have to prove their retail concept if challenged.

Going forward, the DOL will evaluate the existence of retail concept for all businesses under the same standard.  This new rule is effective immediately.

Bottom Line

This rule presents a new opportunity for many employers to potentially take advantage of an overtime exemption previously unavailable to them, and to be judged under criteria applicable to everyone.

It also highlights the reality of today’s uncertain economy, where businesses may need to gain or lose retail attributes over time in order to remain viable.