I believe most would agree, the Department of Labor’s (DOL) interpretative guidance typically provides useful insight to employers navigating often tricky wage and hour laws. This was not the case with the DOL’s decades-old guidance regarding whether an employer was a “retail or service establishment” and could claim an overtime exemption for certain employees paid on commission under Section 7(i) of the Fair Labor Standards Act (FLSA). In its interpretative guidance, the DOL created lists of industries that were either not recognized as retail establishments, or could possibly be recognized as retail establishments. In an action that should be mostly applauded by employers, the DOL recently issued a final rule withdrawing these particularly unhelpful “industry lists” and will instead evaluate every industry according to its regulations.
The Section 7(i) exemption
Section 7(i) of the FLSA exempts employers in the retail and service industries from paying overtime compensation to certain employees who are paid primarily on commission. The FLSA defines a retail or service establishment as “an establishment 75 per centum of whose annual dollar volume of sales of goods or service (or both) is not for resale and is recognized as retail sales or services in the particular industry.” Part 779 of the DOL’s regulations interpreted retail or service establishment as establishments with a “retail concept”, meaning it “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.” 29 CFR §779.318. So far, so good. Right?
The DOL’s Infamous Industry Lists
In 1961 the DOL amended its Part 779 interpretative rule and created two non-exhaustive lists labeling certain establishments as not retail/service and others as “may be” retail/service. Those on the “not” list included: dry cleaners, tax preparers, laundries, roofing companies, travel agencies, blue printing and photostating establishments. Those on the “may be” list included coal yards, fur repair and storage shops, household refrigerator service and repair shops, masseur establishments, piano tuning establishments, reducing establishments, scalp-treatment establishments, and taxidermists. DOL provided no explanation as to how it designated these establishments to either list.
These lists have been lampooned by both employers and the courts for lacking any helpful analysis or application as to why certain industries were or were not exempt under Section 7(i), with the Seventh Circuit Court of Appeals in Chicago calling them an “incomplete, arbitrary, and essentially mindless catalog.” As a result, many businesses that legitimately had retail and service operations but that found themselves on the “not” and even “may be” lists could not avail themselves of the overtime exemption all due to the DOL’s unhelpful designations.
The Final Rule Withdraws the Industry Lists
Recognizing these lists caused more confusion than clarity, the DOL’s recent final rule withdraws both lists. Instead, in determining the existence of a retail concept, the DOL will apply its existing analysis set forth in 29 CFR §779.318 to all establishments — i.e., whether the establishment sells its product to the general public, is at the end of the distribution stream, disposes its products and skills in small quantities and does not manufacture. This approach provides fair and consistent treatment to all businesses and accounts for developments in industries over time.
This rule should be particularly helpful to businesses that may have been reluctant to claim the exemption because they were previously included on the list that the DOL viewed as lacking a retail concept. These businesses should take a careful look at their business models to determine whether they may be viewed as a retail establishment and could possibly claim the exemption.