Catching Up with the Times: DOL Issues Final Rule Simplifying Retail Exemption Under the FLSA

As we recently reported, the DOL promulgated three new final rules regarding wage and hour issues last month. One of these rules brings a much-needed dose of clarity for certain employers on an unusually thorny issue: what exactly is a “retail or service establishment” for purposes of the “retail exemption” under Section 7(i) of the FLSA? This section exempts certain commissioned employees in “retail or service establishments” from the FLSA’s overtime compensation requirement, but the list of qualified employers has been notoriously confusing and vague. Effective May 19, 2020, the DOL’s final rule nixed its almost half-century old catalog of qualifying establishments and adopted a new and uniform framework for determining eligibility for the exemption.

Since 1961, the DOL promulgated two lists of establishments: one listing employers with “no retail concept” that were categorically unable to qualify as retail or service establishments, and another “partial list of establishments” that “may be recognized as retail” for purposes of the exemption. Establishments barred from the exemption included businesses in various industries such as dry cleaners, tax preparers, laundries, roofing companies, travel agencies, accounting firms, construction contractors, and real estate companies. On the other hand, the list of “retail” establishments included restaurants, car dealers, department stores, and repair shops. What was lacking in these (albeit non-exhaustive) lists was a set of underlying principles for classifying establishments. The confusion stemmed from the lack of guidance as to the determination of what entities belong on which list, and establishments not specified on either lists found themselves in limbo. As a result, employers and courts decried the ambiguity and inconsistency of these lists, as exemplified by the Seventh Circuit’s description of them as an “incomplete, arbitrary, and essentially mindless catalog.”

The DOL recognized that the status quo lacked “cohesive criteria underlying the distinction between the businesses that are considered retail establishments.” In the final rule, it eliminated both lists and agreed to “promote consistent treatment” of Section 7(i). Now, every establishment will be evaluated using the same standard set of criteria, which includes being: i) a distinct physical place of business in which 75% of the annual dollar volume of sales of goods or services (or of both) is not for resale; and ii) recognized as retail sales or services in the particular industry. In analyzing these prongs, the DOL considers such factors as an establishment’s accessibility to the general public, its sale of goods and services to the public, and its position at the end of the supply chain. For this reason, employers that have not traditionally been included on the “yes” list as retailers should exercise caution and ensure that their business meets all the criteria under this Section.

The other requirements of Section 7(i) remain the same. To qualify for the exemption, an employee must earn i) at least one and one-half times the federal minimum wage; and ii) more than half of his or her salary in commissions for a representative period not less than one month. As always, employers in states with separate overtime exemption criteria, like California and New York, should heed local laws in this area and consult with counsel where necessary.

Ultimately, in addition to clarity, the benefit of the new DOL rule is flexibility. It allows an industry to develop or shed certain retail or service features as the economy inevitably changes. However, before reclassifying employees, employers should review the rule and their state laws carefully to determine whether they meet the definition of a retail concept.