DOL Removes Industry List, More Employers May Qualify for Retail, Service Establishment Exemption

The US Department of Labor has withdrawn its list of establishments that were not eligible for the Fair Labor Standards Act retail or service establishment exemption, allowing employers in industries ranging from the financial sector to construction to take a fresh look at whether the exemption applies to their businesses.

In a final rule published May 19, the US Department of Labor (DOL) has withdrawn both the “partial list of establishments” that it previously viewed as having “no retail concept” and the “partial list of establishments” that “may be recognized as retail” for purposes of the exemption under Section 7(i) of the Fair Labor Standards Act, which exempts employers in retail and service industries from paying overtime compensation to certain employees paid primarily on a commission basis. DOL bases its rationale for withdrawing the lists, in part, on court decisions that described the “ineligible” list as arbitrary and lacking cohesive criteria, leading to mixed results on whether courts deferred to this list.

With the removal of these lists, DOL hopes that there will be less confusion for employers, employees, and courts. DOL explained its reasoning for removing these lists as promoting “consistent treatment when evaluating section 7(i) exemption claims by treating all establishments equally under the same standards” and that it will “permit the reevaluation of an industry’s retail nature as developments progress over time.”

In sum, DOL has opened the door for employers, DOL, and the courts to take a fresh look at whether certain establishments meet the “retail concept” criteria, allowing consideration of how businesses and the economy have evolved since DOL last updated the list in 1970.

DOL did not issue a proposed rule requesting comments from stakeholders on the removal of the lists. Instead, DOL went straight to a final rule, immediately effective as of its publication on May 19, 2020. DOL stated that because the exemption is an interpretive rule, the provision in the Administrative Procedure Act (APA) requiring publication of a notice of proposed rulemaking does not apply.[1] DOL also noted that because the lists were not published using notice and comment rulemaking, their removal also does not require notice and comment, and that because the rule is not a “major rule” it can be effective immediately.

Background

The FLSA generally requires covered employers to pay nonexempt employees overtime compensation for time worked in excess of 40 hours per workweek.[2] Section 7(i) of the FLSA exempts employers in retail and service industries from paying overtime compensation to certain employees paid primarily on a commission basis. In order for an employee to come within this exemption, the employee’s regular rate of pay must be in excess of one and one-half times the minimum wage, and more than half of the employee’s compensation for a representative period (not less than one month) must be commissions on goods or services.[3] In addition, the employee must be employed by a retail or service establishment, which the DOL defines as “an establishment 75 per centum of whose annual dollar volume of sales of goods or services (or of both) is not for resale and is recognized as retail sales or services in the particular industry.”[4]

DOL has further interpreted “retail or service establishment” as requiring the establishment to have a “retail concept.”[5] An establishment has a retail concept if it

• 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.”[6]

An establishment must traditionally have been regarded as “retail,” and DOL’s regulation states that “the term ’retail’ is alien to some businesses or operations.”[7] By 1970, DOL had issued a nonexhaustive list of 134 types of establishments that it viewed as lacking a “retail concept.”[8] This nonretail list included establishments ranging from accounting firms, advertising agencies, banks, brokers, and tax services to investment counseling firms, medical suppliers, securities dealers, trade associations, transportation companies, real estate companies, and travel agencies. DOL also issued a separate nonexhaustive list of 77 types of establishments that “may be recognized as retail.”[9]

Implications of Withdrawing the Lists and Recommendations for Employers

Employers with establishments that were listed and that were therefore ineligible to claim the Section 7(i) exemption, or establishments that may have been deterred from using the exemption, may now assert that they have a “retail concept” and may be able to qualify as retail or service establishments.

DOL states that it will continue to apply the interpretations in Part 779, but will now take into account changes in the current retail economy and developments and modernizations in industries over time. DOL states that it “will apply one analysis—the same analysis—to all establishments, thus promoting consistent treatment for purposes of the section 7(i) exemption.”

In announcing the rule, DOL stated that establishments will have “more flexibility to work with workers on commission-based pay arrangements.”

Employers should now carefully review all the criteria for this exemption, identified above, to determine whether employees in an establishment may qualify for the exemption. The criteria for the exemption, including the requirement for a “retail concept,” have not changed—what has changed is that DOL and the courts are no longer bound by the categorical lists.

Even if they are no longer categorically ineligible, employers should exercise caution in businesses and operations that have traditionally not been viewed as being retail. Employers should consult with counsel to determine whether DOL or a reviewing court might apply the criteria differently now that they are not excluded by the DOL, and be mindful of whether and how the case law has been impacted in the jurisdiction where the employees are located.

A robust wage and hour audit is prudent because the circumstances for commissioned sales employees differ and, like all the FLSA exemptions, this is a fact-based inquiry with multiple criteria. Some employers may also consider submitting a request for DOL to issue an opinion letter to address a specific establishment, laying out the applicable facts and explaining the reasons why it meets the retail concept.

Finally, as always, employers should also consider whether the states where employees are located impose different or additional requirements.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Los Angeles
John S. Battenfeld

Miami
Anne Marie Estevez

New York
Christopher A. Parlo
Samuel S. Shaulson

Orange County
Barbara J. Miller

Philadelphia
Michael J. Puma

Princeton
Thomas A. Linthorst

Washington, DC
Russell R. Bruch

[1] See 5 U.S.C. § 553(b).

[2] 29 U.S.C. § 207(a).

[3] 29 U.S.C. § 207(i).

[4] 29 C.F.R. § 779.312.

[5] Id. at § 779.316.

[6] Id. at § 779.318(a).

[7] Id. at § 779.316.

[8] Id. at § 779.317.

[9] Id. at  779.320.