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US Department of Labor Modifies Regulations Governing “7(i)” Retail Commission Employee Exemption

by D. Gregory Valenza | |

The Fair Labor Standards Act exempts from overtime premium requirements certain sales employees in the “retail” industry.  California’s Industrial Welfare Commission Wage Order 7-2001 contains an analogous exemption.  Note that the “inside sales” exemption, as it is called, is not the same as the “executive” or other “white collar” exemptions.  It applies only to the overtime pay requirement. So, in California, for example, if the exemption applies, the employer is still responsible for meal and rest period compliance, reporting time, and the other provisions in the Wage Order.  “Exempt” executives, on the other hand, are not subject to those Wage Order provisions.

The federal exemption, section 207(i) of the Fair Labor Standards Act, states “any employee of a retail or service establishment” is exempt from federal overtime requirements when

(1) the regular rate of pay of such employee is in excess of one and one-half times the minimum hourly rate applicable to him under section 206 of this title, and (2) more than half his compensation for a representative period (not less than one month) represents commissions on goods or services.

So, for retail employees, who work on commission, they may qualify for the exemption if they meet the two provisions above.  In addition, the employer itself must satisfy certain business-mix and sales volume requirements, which are too boring even for this blog.

Much time and money have been spent over the years about whether the employee has earned “commissions” exceeding one-half of compensation.  There are fights over what a commission really is, whether a person who doesn’t sell can earn a commission, whether the amount of the commission compared to non-commission compensation is enough to qualify the employee for the exemption, and more.

Another fertile source of litigation is over whether the employers seeking the exemption are indeed working in a “retail or service establishment.”  For many years, the U.S. Department of Labor has had in place regulations addressing this issue.  They start at 29 CFR 779.301, and are linked here. Even the United States Supreme Court has weighed in on what counts as “retail or service establishments.”

And those regulations are why we have gathered here today. The DOL has modified its regulations significantly over what qualifies as a “retail or service establishment.”  What is staying the same is that a “retail or service establishment”  requires a “retail concept.” A retail concept, the DOL has explained in the regulations linked above, typically “sells goods or services to the general public,” “serves the everyday needs of the community,” “is at the very end of the stream of distribution,” disposes its products and skills “in small quantities,” and “does not take part in the manufacturing process.”

In the past, the DOL had an entire regulation that listed types of businesses that would absolutely not qualify as “retail or service establishments.”  That former regulation was 29 CFR 779.317 here  As a result, those types of businesses could not claim the “inside sales” exemption quoted above, no matter what.  The DOL also had in place a list of businesses that “may” qualify for the exemption, 29 CFR 779.320. Those types of businesses might enjoy the exemption, as long as they can prove the elements of “retail or service establishment” contained in the other regulations linked above.

No more. Sections 779.317 and 320 are being repealed as of tomorrow.  Why?  The DOL explains in the preamble to its regulation deleting sections 317 and 320.  You can read that here.  Basically, the DOL wants the “retail concept” definition to be analyzed under one, consistent framework, and not according to a “partial list” of businesses that are categorically excluded, or included.

The result of the DOL’s action is that businesses will be able to assure they qualify for the “exemption” without facing exclusion by section 779.317.  As stated, though, these businesses will still have to establish they qualify under the remaining regulations contained in Part 779.

In California, the Industry Order covering the retail industry is number 7-2001.  That Wage Order contains an inside sales exemption, as I said above.(Section 3(D)).  Interestingly, though, IWC Wage Order 4-2001, applicable to “occupations” not limited to a particular industry, also contains an inside sales exemption.  In the past, that exemption in Wage Order 4 was suspect because the DOL was so strict about what constituted a “retail concept.” One would think that if Wage Order 7 – covering the retail industry –  did not apply, there would be no way to qualify for the inside sales exemption under federal law, even if California would allow it.  The DOL’s willingness to entertain types of businesses on their own merit, instead of according to a list may help California employers  covered by Wage Order 4 assert the inside sale exemption.  Maybe.

Stay tuned.


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