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06.22.20   |   Insights

U.S. Department of Labor Simplifies the Retail or Service Establishment Exemption for Overtime Compensation

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Effective as of May 19, 2020, the Department of Labor Wage and Hour Division (“DOL”) announced a final rule that may change the requirements of overtime compensation for some employers.

The Fair Labor Standards Act (“FLSA”) generally requires covered employers to pay non-exempt employees overtime compensation at the rate of 1.5 times an employee’s regular rate of pay for time worked in excess of 40 hours per workweek. Section 7(i) of the FLSA provides an exemption for employers from the overtime compensation requirement for certain employees of retail or service establishments that are paid primarily on a commission basis.


Since 1961, the DOL provided a set list reporting which establishments lacked a “retail concept” and as a result, were not permitted to claim the exemption to paying overtime compensation. Although the list was referenced for almost 60 years, the list was questioned by many courts as it was described as incomplete and arbitrary.

The Simplified Analysis

In an effort to remedy concerns with the old rule, the DOL announced a final rule to provide a simplified and uniform analysis for employers when determining whether they qualify as a “retail or service” establishment, and are therefore exempt from paying overtime compensation to certain employees. In effect, this final rule withdraws two portions of the old rule, including the list of establishments previously identified as lacking a retail concept and an additional list of entities that “may be recognized as retail.” As a result of these withdrawals, establishments that had been listed as lacking a retail concept may now assert that they have a retail concept and may be able to qualify as retail or service establishments.

The final rule allows the DOL to apply one analysis to all entities to determine which employers will fall under the exemption for overtime compensation. For an employer to qualify for the exemption under the new rule, three criteria must be met:

  • The employee must be employed by a “retail or service” establishment, which is defined by the DOL as “an establishment 75 per centum of whose annual dollar volume of sales of goods or services (or both) is not for resale and is recognized as retail sales or services in the particular industry.”
  • The employee’s regular rate of pay must exceed 1.5 times the applicable minimum wage under the FLSA.
  • More than half of the employee’s total earnings in a representative period must be commissions.

The driving force behind the decision to withdraw the provisions from Section 7(i) is to recognize the dynamic characteristics of the economy. The DOL understands that an industry may gain or lose retail characteristics over time as the economy develops and modernizes and that a rigid list of establishments cannot account for such developments.

If you are an employer, do you know how this final rule impacts the compensation structure for your employees? The attorneys at CCJ are able to assist you in answering this question and making informed business decisions moving forward.

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