The FLSA Exemption for Commissioned Retail and Service Establishment Employees

by | Apr 20, 2020 | Colorado Employment Law Blog

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.

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 good 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.

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).

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 other basis … ” 29 C.F.R. § 779.415(a). All compensation resulting from a bona fide commission rate are 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).

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 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 

If you have additional questions regarding the retail sales exemption, please contact one of Baird Quinn’s Denver employment lawyers.