Benefits and Compensation

Staffing Firms Gain Extra FLSA Overtime Protection

Temporary staffing firms may qualify as “retail or service establishments” and therefore may be able to apply the Fair Labor Standards Act’s (FLSA) “retail sales” overtime exemption to some of their employees, according to a recent opinion letter from the U.S. Department of Labor (DOL).

FLSA
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The new opinion could provide significant benefits to staffing companies with an inside sales force or commissioned recruiters in their business operations.

How We Got Here

For the past 2 decades, FLSA lawsuits have increased more than 200%. The DOL and the federal courts have broadly construed the Act’s protections, making it more difficult for employers to prove an employee—even one who is highly paid—falls within one of the overtime exemptions.

The U.S. Supreme Court altered the playing field in Encino Motorcars, LLC v. Navarro, which said a narrow construction of the FLSA’s exemptions was improper. Instead, the exemptions should be “fairly” interpreted since they are “as much a part of the [Act’s] purpose as the overtime-pay requirement.” The ruling led the DOL to revisit how it has interpreted the exemptions, including in the recent “retail sales” opinion letter, issued on January 19, 2021.

What Retail Sales Exemption Says

The retail sales exemption, contained in 29 U.S.C. § 207(i), provides an employee is exempt from the FLSA’s overtime (but not the minimum wage) requirements if she (1) works at a “retail or service establishment,” (2) has a regular rate of pay exceeding one and one-half times the applicable minimum wage, and (3) has earnings in a representative period comprised of more than 50% commissions. Employees who qualify for the exemption don’t need to be paid on a salary basis.

A business qualifies as a “retail or service establishment” if:

  • It’s engaged in the making for selling of goods or services;
  • At least 75% of the business’ sales for goods or services, or both, must be recognized as retail in the relevant industry; and
  • No more than 25% of the company’s sales for goods or services may be sales for resale.

With regard to the first element, the DOL had long limited application of the “retail or service establishment” label only to retail businesses that sell goods or services to consumers. Several courts held the agency’s view was wrong, however, and that a business selling its goods or services to other commercial enterprises also could also qualify as a retail or service establishment. The agency has since adopted the same position.

As to whether a business is “recognized as retail” in the industry (the second element listed above), the DOL had long taken the view that the business must have a “retail concept,” which means it:

  • Sells goods or services to the general public;
  • Serves the everyday needs of the community;
  • Is located at the very end of the distribution stream;
  • Dispenses its products or skills in small quantities; and
  • Doesn’t take part in the manufacturing process.

Moving from One List to Another

The DOL had published a list of industries it stated did not have a “retail concept,” and the list included staffing companies. Some courts criticized the list, however, as “incomplete, arbitrary, and essentially a mindless catalog,” adding it did “not appear to flow from any cohesive criteria.”

Based on the criticisms and in light of Encino Motorcars, the DOL withdrew the list on May 19, 2020. Then, in an August 31 opinion letter, it reiterated that a business can be a “retail or service establishment” even if it sells its goods or services to other commercial customers.

Accordingly, in analyzing whether staffing firms qualify as “retail or service establishments,” the DOL concluded:

  • The staffing companies provide their “services to businesses in the general public, which may serve the employment needs of the community in which the businesses are located”;
  • “The placement of a [temporary] worker is the ‘end of the stream of distribution’,” and staffing companies don’t place workers “in bulk” or engage in manufacturing; and
  • “[A] typical staffing firm may have a retail concept, and its sales of recruitment and staffing services may be properly recognized as retail by the staffing industry.”

The DOL also concluded staffing firms can meet the third requirement of a “retail or services establishment” because they don’t typically “resale” a temporary worker to its customer.

Opinion Letter’s Impact

The DOL’s latest opinion letter provides staffing companies with an opportunity to reevaluate their compensation systems for some of the commissioned positions within the organization. Inside sales and recruiter positions, which typically don’t qualify for the “outside sales” or “administrative” exemptions, could qualify for the retail sales exemption.

Keep in mind, however, the DOL’s opinion is based on facts provided to it, and staffing companies primarily serving as secondary suppliers may not fall within the agency’s conclusion. Also, the new letter applies only to the FLSA, and state laws may differ.

Finally, even if a position qualifies for the retail sales exemption, you must still record the employee’s work time to ensure the individual’s regular rate of pay exceeds one and one-half times the minimum wage during a given period.

Steven J. Whitehead is an attorney and the chair of the employment and labor relations department at Taylor English Duma LLP in Atlanta, Georgia. You can reach him at swhitehead@taylorenglish.com.