The New Retail and Service Exemption: DOL Revokes Outdated Lists

Effective with the May 19, 2020, publication in the Federal Register, the U.S. Department of Labor’s (DOL) Wage and Hour Division revokes the arbitrary lists it created in 1961 identifying industries that may, or would not, qualify as retail or service in nature “for purposes of an exemption from overtime pay applicable to commission-based employees.” The final rule removed the lists contained at 29 CFR 779.317 and 779.320.

Agreeing with courts interpreting the guidance over the years that the lists are “incomplete, arbitrary, and essentially [a] mindless catalog,” as noted in Alvarado v. Corporate Cleaning Services, Inc., 782 F.3d 365, 371 (7^th Cir. 2015), the retail and service establishments lists now are revoked allowing all industries to review the exemptions criteria and potential application based on how they operate today and in the future.

Why Does This Matter?

The withdrawal of the two provisions from the WHD’s regulations matters because the exemption in Section 7(i) of the Fair Labor Standards Act (FLSA) provides a mechanism for retail or service establishments to exempt certain employees from overtime requirements if three conditions are met. That requirement obliges employers to pay employees one-and-one-half of their regular rate of pay for all hours worked over 40 in a given week. According to the WHD’s Fact Sheet #20, for an employer to qualify for the exemption “three conditions must be me:

1. the employee must be employed by a retail or service establishment, and
2. the employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked, and
3. more than half the employee’s total earnings in a representative period must consist of commissions.”

Key Takeaways

While the new final rule certainly seems helpful to employers as it streamlines the definition of retail under the FLSA and removes the prior industry lists, employers still need to make sure they meet the definition of a retail or service establishment if they want to take advantage of the Section 7(i) overtime exemption. Employers that have historically not been viewed as being a retail establishment may want to use caution if they would like to avail themselves of the 7(i) exemption.

While the removal of the list of industries lacking a retail concept contained previously in 29 CFR 779.317 may provide some employers the opportunity to take advantage of the exemption, employers could still be subject to litigation over the retail nature of their businesses. Employers have the burden of establishing all three factors of the Section 7(i) exemption—the first being that the employee is employed by a retail or service establishment. There is no guarantee that this change in the regulations has really expanded the number of retail establishments, as the retail definition has not changed. A retail establishment is an establishment 75 percent of whose annual dollar volume of sales is not for resale and is recognized as retail in the particular industry. The WHD applies the analysis in 29 CFR Part 779.24 to all establishments when determining whether an establishment qualifies as a retail establishment. And, as always, employers are also subject to the state laws in which they operate.