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Retail Sales Exemption to Federal Wage Law

by Kara Shea

Typically, when employers consider whether their employees are exempt from federal overtime pay requirements, they think in terms of the “big three” exemptions — administrative, executive, and professional, collectively known as the “white-collar” exemptions.

When reviewing job positions, classifying new positions, or conducting an internal audit, however, remember to consider some lesser-known exemptions that may apply to your business. One such exemption is known as the retail sales exemption.

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Exemption criteria
The Fair Labor Standards Act (FLSA), the federal law governing overtime, contains a provision exempting certain retail or service establishments from paying overtime. Specifically, a retail or service establishment need not pay overtime to an employee if:

  • the regular rate of pay (meaning the employee’s total compensation for each week, including salary and commissions, divided by the number of hours worked) of the employee is in excess of one and one-half times the minimum wage; and
  • more than half of the employee’s compensation for a representative period (not less than one month) represents commissions on goods or services.

Whether an employer qualifies as a “retail or service establishment” eligible for the exemption is a factual inquiry. The regulations interpreting the FLSA provide a partial list of establishments whose sales or services may be recognized as retail. The list includes businesses ranging from beauty shops to drug stores, automobile dealers to funeral homes, restaurants to taxidermists, and public parking lots to shoe repair shops.

For a business to meet the definition of “retail or service establishment” under federal regulations, however, it must obtain at least 75 percent of its annual revenue from sales, meaning sales of goods or services (or both) not for resale. The business also must be recognized as retail sales or services in the particular industry.

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Courts weigh in
Not many courts have discussed the retail sales exemption. It does come up from time to time, however. In a recent decision from the Ninth U.S. Circuit Court of Appeals, the exemption was applied to finance and insurance managers working at several automobile dealerships. The employees were compensated almost entirely on commission.

The court stated that “automobile sales are recognized as retail sales by the industry and the FLSA.” The court also held that the employees were exempt based on the employer’s status as a retailer and the fact that they were paid on commissions despite the fact that they themselves weren’t actually engaged in sales.

The court held that “the duties performed by the finance officers were an integral, and integrated, part of their employer’s auto dealership operations as a whole.” The retail sales exemption may apply even if the commissions paid to employees aren’t based directly on sales.

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A word of caution: Courts don’t always warm to the retail sales exemption. A federal district court in Nashville, Tennessee recently ruled that the exemption wasn’t applicable to employees of an auto parts store.

In the Wilkes v. The Pep Boys case, flat-rate mechanics disputed their denial of overtime pay. Pep Boys attempted to argue that the retail sales exemption applied because the employees were paid “on commission.” Upon closer examination of the pay structure, however, the court concluded that the employees were really compensated on a piece-rate basis and didn’t receive commissions.

Bottom line
The retail sales exemption provides a little-known avenue for qualified employers to avoid overtime liability under the FLSA. Those wishing to use the exemption, however, must ensure that they qualify as a “sales or retail establishment” and that they pay employees real commissions that, in addition to any other compensation, exceed the statutory minimum amount.

As with any exemption, the burden is on you to show that an employee isn’t entitled to overtime. You should discuss the matter with an experienced employment attorney and make sure he or she has all the facts about your business before applying this exemption.

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