Colorado Employees Exempt from The Fair Labor Standards Act (FLSA)

by | Apr 20, 2020 | Colorado Employment Law Blog

Commissioned Retail and Service Establishment Employees


What is the Fair Labor Standards Act?

The federal Fair Labor Standards Act (FLSA) generally requires covered employers to pay employees minimum wage as well as overtime compensation at one and one-half the employee’s regular rate of pay if they work more than 40 hours in a week. The FLSA, however, exempts certain employees from its minimum wage and overtime requirements. This means an exempt employee is not entitled to minimum wage and/or overtime under the FLSA.


What is an Exempt Employee?

An exempt employee is an employee who is exempt from certain provisions of labor laws, particularly those relating to overtime pay. Exempt employees are not eligible to receive overtime compensation for working more than 40 hours per week and are usually salaried. 

The Fair Labor Standards Act (FLSA) sets the criteria for non-exempt and exempt Colorado employees. The criteria typically includes factors like the nature of their job duties, level of responsibility, and salary threshold. Exempt employees often hold professional, executive, administrative, or managerial positions, and they are not subject to the same wage and hour protections as non-exempt employees.


FLSA Exemptions for Commissioned Retail & Service Establishment Employees

There are multiple types of exemptions. One such exemption is for commissioned salespeople within retail or service establishments. When this exemption applies, the employee is not entitled to overtime compensation. The exemption applies to (a) commissioned employees of retail or service establishments, (b) whose regular rate of pay is over 1.5 times the minimum wage for every hour worked in a workweek in which overtime hours are worked, (c) where over half the employee’s compensation for a representative period comes from commissions on goods or services. See 29 U.S.C. § 207. If any one of the three (3) requirements is not met, the exemption is inapplicable and overtime compensation must be paid for all work hours over 40 in a workweek.


Legal Definition of a Work Establishment 

The Federal Regulations enacted in conjunction with the FLSA define an “establishment” as “a ‘distinct, physical place of business’ rather than [] ‘an entire business or enterprise’ which may include several separate places of business.” 29 C.F.R. § 779.23.The FLSA regulations define retail or service establishments as those establishments for which 75% of its annual dollar volume of sales of goods or services (or both) is not for resale and “is recognized as retail sales or services in a particular industry.” 29 C.F.R. § 779.411. According to the regulations, “[t]ypically a retail or service establishment is one which sells goods or services to the general public. It serves the everyday needs of the community in which it is located. The retail or service establishment performs a function … which is at the very end of the stream of distribution, disposing in small quantities of the products and skills of such organization and does not take part in the manufacturing process.” 29 C.F.R. § 779.318(a).


Hourly Pay Percentage vs Commission Percentage

Commissions must also represent more than 50% of the employee’s compensation in a representative period. If only a portion of the employee’s pay comes from commissions, it is the employer’s duty to add up all of the employee’s compensation during the representative period to determine if the commissions exceed the sum of all other compensation paid. Id. In this analysis, all compensation “in whatever form or by whatever method paid should be included, whether calculated on a time, piece, incentive or another basis… ” 29 C.F.R. § 779.415(a). All compensation resulting from a bona fide commission rate is deemed commissions. 29 U.S.C. § 207(i)(2). The Regulations warn, though, that “[a] commission rate is not bona fide if the formula for computing the commissions is such that the employee, in fact, always or almost always earns the same fixed amount of compensation for each workweek (as would be the case where the computed commissions seldom or never equal or exceed the amount of the draw or guarantee).” 29 C.F.R. § 779.416(c). The representative period cannot be less than one month or more than one year. 29 C.F.R. § 779.417(c).


Retail Sales Exemption Tips for Colorado Employers

To support the retail sales exemption, the employer must maintain detailed and accurate pay records. Otherwise, it will not be able to show that all conditions of the exemption have been satisfied. The regulations establish special record-keeping obligations on employers who have elected to pay employees by the commission, including (a) a symbol, letter, or other notation placed on the payroll records identifying each employee who is paid pursuant to section 7(i); (b) a copy of the agreement or understanding under which the exemption is utilized or, alternatively, a memorandum summarizing the terms of the arrangement, including the basis of compensation, the applicable representative period, and the date the agreement was entered into; and (c) a record of total compensation paid to each employee each pay period. 29 C.F.R. § 516.16; see also 29 C.F.R. § 779.420.


The Department of Labor has published a Fact Sheet setting forth many of the requirements for the retail sales exemption. This Fact Sheet may be accessed through this link. DOL Fact Sheet 


For more information regarding the retail sales exemption, please contact one of Baird Quinn’s Denver employment lawyers. Baird Quinn’s employment lawyers have significant experience, not only litigating employment cases but also trying employment cases before state and federal court judges and juries, as well as AAA and FMCS arbitrators.