On May 19, 2020, the United States Department of Labor’s Wage and Hour Division (WHD) implemented a final rule withdrawing partial lists of establishments that it previously interpreted as either having “no retail concept” or possibly having a retail concept for purposes of the Fair Labor Standards Act’s (FLSA) Section 7(i) overtime exemption for commissioned retail sales employees.  Effective today, the rule allows all employers to apply a uniform analysis in determining whether they qualify as a “retail or service” establishment, without any predetermined industry restrictions.

FLSA’s Section 7(i) Exemption

Generally, the FLSA requires covered employers to pay employees overtime compensation for time worked in excess of 40 hours in a given workweek, unless the employees qualify for one or more of the exemptions set forth in Sections 7 or 13 of the statute.  Section 7(i) exempts a “retail or service” establishment from the FLSA’s overtime requirements for certain commission-based employees.  An employee of a “retail or service” establishment is eligible for the exemption so long as: (i) the employee’s regular rate of pay averages more than one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked; and (ii) more than half the employee’s total earnings in a representative period comes from commissions.

The DOL’s interpretative regulations (found at 29 CFR Part 779) set forth certain criteria required for employers to qualify as a “retail or service establishment,” including that the employer have a “retail concept” (29 CFR 779.316).  According to the DOL, an employer with a “retail concept” will typically sell goods and/or services to the general public, serve the day-to-day needs of the community, is at the very end of the stream of distribution, disposes in small quantities their products/skills, and does not take part in the manufacturing process (29 CFR 779.318).

In 1961, WHD implemented interpretive regulations setting forth two categorical lists – one containing industries that it viewed as “lacking” a “retail concept” (29 CFR 779.317), and thus prohibited from claiming the Section 7(i) exemption; and another including industries that “may be recognized” as having a “retail concept” (29 CFR 779.320), and thus could potentially claim the Section 7(i) exemption.  The lists had not been amended since the early 1970s, and with few exceptions, the regulations provided no explanation for why certain industries were included on either list.

In the decades since the 1970s, the evolution of retail business models in the U.S. (especially in the technology and services industries, and away from brick-and-mortar retailers to online retail platforms) made the categorical lists in Part 779 of increasingly lower utility to employers.  A number of the “establishments” on the lists seem painfully out of date (e.g., blacksmiths, public baths, and tobacco auction warehouses), and the lists do not address a number of 21st century businesses.

May 19 Final Rule

On May 19, 2020, WHD implemented a final rule withdrawing the above two categorical lists previously found at 29 CFR 779.317 and .320 from its regulations.  Pursuant to the final rule, WHD will now apply the same analysis to all employers when determining whether they qualify as “retail or service” establishments.  Employers that have been categorically excluded from claiming the Section 7(i) exemption may now assert that they have a “retail concept” so long as they satisfy the criteria set forth in 29 CFR 779.318 and other relevant regulations.

The final rule comes after years of judicial scrutiny regarding WHD’s categorical lists.  For example, some federal courts have criticized the categorical lists as being “arbitrary” and exhibiting no “rational basis” for distinguishing among certain establishments.  Others have opined that the list identifying establishments that “may be” recognized in the retail category had no meaningful impact, because analysis of whether the establishment met the relevant criteria for a “retail concept” was still required.  Employers in industries that did not appear on either list struggled with whether they more resembled the businesses on the “no retail concept” or “may be” lists.

Implications

The final rule streamlines the “retail concept” analysis for employers and should promote a more consistent and logical approach to determining whether a business qualifies as a retail or service establishment for purposes of the Section 7(i) exemption, without the rigidity proscribed by the previous establishment lists.  As the WHD concluded in issuing the final rule, the withdrawal of the partial lists provides for much-needed flexibility as industries evolve and the characteristics of businesses change over time.

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Photo of Allan Bloom Allan Bloom

Allan S. Bloom is a nationally recognized trial lawyer and advisor who represents management in a broad range of employment and labor law matters. As a litigator, Allan has successfully defended a number of the world’s leading companies against claims for unpaid wages…

Allan S. Bloom is a nationally recognized trial lawyer and advisor who represents management in a broad range of employment and labor law matters. As a litigator, Allan has successfully defended a number of the world’s leading companies against claims for unpaid wages, employment discrimination, breach of contract and wrongful discharge, both at the trial and appellate court levels as well as in arbitration. He has secured complete defense verdicts for clients in front of juries, as well as injunctions to protect clients’ confidential information and assets.

As the leader of Proskauer’s Wage and Hour Practice Group, Allan has been a strategic partner to a number of Fortune 500 companies to help them avoid, minimize and manage exposure to wage and hour-related risk. Allan’s views on wage and hour issues have been featured in The New York TimesReutersBloomberg and Fortune, among other leading publications. His class-action defense work for clients has saved hundreds of millions of dollars in potential damages.

Allan is regularly called on to advise boards of directors and senior leadership on highly sensitive matters such as executive transitions, internal investigations and strategic workforce planning. He also has particular expertise in the financial services industry, where he has litigated and arbitrated cases, including at FINRA and its predecessors, for more than 20 years.
A prolific author and speaker, Allan was the Editor of the New York State Bar Association’s Labor and Employment Law Journal from 2012 to 2017. He has served as an author, editor and contributor to a number of leading treatises in the field of employment law, including ADR in Employment Law (ABA/Bloomberg BNA, Senior Editor), Employment Discrimination Law (ABA/Bloomberg BNA, Final Proof Editor), Cutting Edge Advances in Resolving Workplace Disputes (Cornell University/CPR, Editor), The Employment Law Review (Law Business Research, U.S. Chapter Author), and The Complete Compliance and Ethics Manual (SCCE, Chapter Author).

Allan is a member of the NYSBA’s House of Delegates, sits on the Executive Committee of the NYSBA’s Labor and Employment Law Section, and is a Fellow of the College of Labor and Employment Lawyers. He has been recognized as a leading practitioner by Chambers since 2011.

Photo of Rachel Philion Rachel Philion

Rachel S. Philion is a partner in the Labor & Employment Law Department, co-head of the Wage and Hour Practice Group and a member of the Employment Litigation & Arbitration and Class and Collective Actions Practice Groups.

Rachel represents management across all industries…

Rachel S. Philion is a partner in the Labor & Employment Law Department, co-head of the Wage and Hour Practice Group and a member of the Employment Litigation & Arbitration and Class and Collective Actions Practice Groups.

Rachel represents management across all industries in a broad array of employment matters, including wage-and-hour, discrimination, harassment, retaliation, as well as whistleblowing, wrongful discharge and breach of contract disputes.  In addition to jury trial experience, she has extensive experience litigating nationwide class and collective actions.

In addition to Rachel’s active employment litigation practice, she regularly advises clients on litigation avoidance strategies and compliance issues, conducts wage and hour audits and leads workplace investigations.

Rachel was selected as a “Rising Star” by The Legal 500 for 2019 and New York Super Lawyers for 2017-2019.  She is a current member of the Committee on Labor and Employment Law of the New York City Bar Association, and a past member of the Executive Committee of the Labor and Employment Law Section of the New York State Bar Association and former co-chair of the Section’s New Lawyers’ Committee.