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Understanding the FLSA and Colorado Overtime Laws
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. Before diving into specific exemptions, employers and employees must understand the basic legal differences between exempt vs non exempt in Colorado. The FLSA exempts certain employees from its minimum wage and overtime requirements, meaning a properly classified exempt employee is not entitled to overtime.
What is the FLSA Section 7(i) Inside Sales Exemption?
There are multiple types of exemptions. One highly specific exemption is for commissioned salespeople within retail or service establishments—often referred to as the “inside sales exemption.” When this exemption applies, the employee is not entitled to overtime compensation.
Requirements for the Commissioned Retail & Service Establishment Exemption
The exemption applies only 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, and (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(i). 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 “Retail or Service 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… and does not take part in the manufacturing process.” 29 C.F.R. § 779.318(a).
The 50% Commission Rule and Regular Rate of Pay
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. 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…” 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).
FLSA Inside Sales Exemption Compliance Tips for 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. 29 C.F.R. § 516.16; see also 29 C.F.R. § 779.420.
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 litigating complex wage and hour cases in Colorado.
Frequently Asked Questions: FLSA Exemptions in Colorado
What is the inside sales exemption?
The inside sales exemption (formally known as the Section 7(i) exemption) applies to commissioned employees of retail or service establishments. It exempts them from FLSA overtime requirements as long as their regular rate of pay is 1.5 times the minimum wage, and more than half of their compensation comes from commissions during a representative period.
Are Colorado exempt employee laws different from the FLSA?
Yes. While the Fair Labor Standards Act sets the federal baseline, the Colorado Overtime and Minimum Pay Standards (COMPS) Order often has stricter requirements for salary thresholds and duties tests. Colorado employers must comply with whichever law provides the greatest benefit and protection to the employee.
Can a Colorado salaried exempt employee face an unpaid disciplinary suspension under the FLSA?
Generally, salaried exempt employees must receive their full salary for any week in which they perform work. However, the FLSA does allow employers to make deductions from an exempt employee’s salary for unpaid disciplinary suspensions of one or more full days, provided the suspension is imposed in good faith for infractions of workplace conduct rules (such as sexual harassment or workplace violence).