Revised DOL Section 7 (i) Exemption Regulation: Is your business a retail or service establishment? | Small
Is an employer’s business considered a “retail or service establishment” for the purpose of meeting the exemption requirements of Section 207 (i) of the Federal Fair Labor Standards Act ? The answer to this question may have changed depending on the recent regulatory action by the Department of Labor (DOL).
Since 1961, the answer has often been determined by an “incomplete, arbitrary and essentially senseless catalog” of establishments that the DOL identified as either part of or outside of what it considered to be a retail or service establishment. On May 8, 2020, the DOL withdrew the regulations that included these lists, acknowledging that there had never been “an explanation for why any of the listed industries were included.” Many courts have criticized the DOL for its lack of consistent criteria or bases for determining which establishments “do not have a retail concept” and which “may be recognized as retail”. Other courts have referred to DOL regulations in their analysis. From now on, each establishment will be assessed equally in a single analytical framework, without the burden or benefit of being included in the DOL lists.
Section 7 (i) Exemption
Section 207 (i) of the FLSA (“7 (i)”) is intended to relieve employers of retail and service businesses from the obligation to pay overtime to certain commissioned employees. In 1961, the DOL issued 29 CFR part 779 as a rule of interpretation, including Subpart D, entitled “Exemptions for Certain Retail or Service Establishments”. As part of this rule of interpretation, the DOL has introduced a long, but not exhaustive, list of 89 types of establishments “to which the concept of retail sale does not apply”. In 1970, the DOL added 45 more establishments to this list for a total of 134 establishments that could not meet the requirements of 7 (i) because they (in the opinion of the DOL) could not be considered as “retail” businesses. Types of establishments include loan and credit agencies, dry cleaners, accountants, medical and dental offices, law firms, pharmacies, employment agencies, gambling establishments, loan preparers. tax returns, travel agencies, garbage removal, HVACs, building and other contractors, warehouses, transportation companies, and machinery and equipment vendors.
At the same time, the DOL introduced a non-exhaustive list of 77 types of establishments which may be recognized as a retail business. These included car dealerships, car washes and repair shops; lounges; bowling lanes; cafeterias; medicines, furs, antiques, porcelain, household appliances, cigars, hardware, sporting goods, jewelry and other stores; restaurants, florists, hotels and cemeteries. Again, the DOL acknowledges that there was no explanation for why some establishments were on either of the lists and that the courts, after comparing the two lists, concluded that they did not. there was “no operative principle or consistent criterion underlying the distinction between enterprises” on the two lists.1
Removed lists, single scan to use for all “retail” businesses
With immediate effect, the DOL has withdrawn the two lists found in 29 CFR 779.317 and 779.320. By doing so, business establishments that were once excluded can now be considered to offer a “retail” product or service and therefore qualify for the exemption. Similarly, employers will no longer be able to point to the DOL list of “qualified” retail businesses to meet the requirements of 7 (i). The removal of these lists is intended to ensure that all businesses are treated uniformly using a single analysis to determine whether a business is a retail or service establishment eligible for the exemption. Using a single analysis better captures changes in the characteristics of an industry that occur over time that make a particular business “retail.”
The regulatory change does not impose any new requirements. The single analysis will now be conducted using the remaining part of the same rule of interpretation, simply without reference to both lists. The definition of “retail or service establishment” remains unchanged: “an establishment for which 75% of the annual dollar volume of sales of goods or services (or both) is not intended for resale and is recognized such as retail sales or services in particular industry. . “A retail or service establishment sells goods or services to the general public, and serves the daily needs of the community in which it is established and operates at the very end of the distribution stream, selling in small quantities to a end user disseminated in a manner similar to other consumer goods and services. To be considered a retail or service establishment, the business should normally be accessible to the general public. But, this does not require the audience to actually frequent a physical location, being available by phone or online is enough.
Parts of the DOL rule continue to maintain that certain business operations such as insurance or electricity companies do not have a retail or service concept and, therefore, will not qualify for the exemption. . Commenting on the delisting, the DOL noted that a particular industry may gain or lose retail characteristics as the economy grows and modernizes. At the same time, however, the rule in Part 779 continues to state that the term retail is “foreign to certain businesses”, and the DOL refers to legislative history from 1949, as well as court rulings. later, to support the position that some establishments have not traditionally been considered retail and therefore cannot meet the requirements of 7 (i).
Once an employer determines that they are operating a retail or service establishment, they can determine whether any of the employees of that establishment may be exempt from statutory overtime, depending on the method of compensation. . To avoid the overtime requirement, employees should receive more than half of their salary in the form of bona fide commissions on goods or services. The employer can use a representative period of one month, up to one year, to measure compliance with this requirement. The employee’s regular rate for each hour worked must also exceed one and a half times the minimum wage.
In some cases, the list of DOL establishments without a retail concept in Part 779 presented an insurmountable obstacle to an employer seeking to apply this overtime exemption to certain employees paid primarily on commission. In many ways, the lists seemed anachronistic; businesses such as “blacksmiths” and “toll bridge companies” did not have a retail concept, but “fur shops” and “trailer camps” were referred to as retail . The recent action of the DOL represents an effort to bring the application of the rule into the 21st century, but employers must always consider the complicated legislative history of 7 (i), as evidenced by other Part 779 regulations, when assessing whether their business qualifies as “retail.”