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This article is part one of a two-part series on the commission-based employee overtime wage exemption under the Fair Labor Standards Act (FLSA).  The FLSA, at 18 U.S.C. § 207, generally requires employees to be paid one and a half times their normally hourly rate when working more than forty hours in a week.  However, this federal statute contains some nuances and exceptions that allow employers to avoid the requirement to pay overtime premium compensation.  One of these exceptions is for commission-based employees who work for “retail or service establishments.”  Peter Mavrick is a Fort Lauderdale employment attorney who defends Florida businesses and their owners against claims for overtime wages.

The FLSA (at 18 U.S.C. § 207(i)) explains the commission-based employee exemption:

No employer shall be deemed to have violated [overtime law] by employing any employee of a retail or service establishment for a workweek in excess of the applicable workweek specified therein, if (1) the regular rate of pay of such employee is in excess of one and one-half times the minimum hourly rate applicable to him under [federal minimum wage law], and (2) more than half his compensation for a representative period (not less than one month) represents commissions on goods or services. In determining the proportion of compensation representing commissions, all earnings resulting from the application of a bona fide commission rate shall be deemed commissions on goods or services without regard to whether the computed commissions exceed the draw or guarantee.

Thus, the FLSA exemption for commission-based employees requires that the employee’s hourly rate after commissions must be at least $10.88 per hour (i.e., 1.5 times the current federal law minimum wage of $7.25/hour), and more than half of the employee’s total compensation must be from commissions.  In many cases, however, application of this commissioned-based employee exemption depends on whether the employer qualifies as a “retail or service establishment.”

As explained by one South Florida federal court Judge, in Ebersole v. Am. Bancard, LLC, 08-80703-CIV-MARRA, 2009 WL 2524618 (S.D. Fla. Aug. 17, 2009), “[n]o statutory definition of ‘retail or service establishment’ currently exists.”  Historically, federal law defined the meaning of this term at 18 U.S.C. § 213, which exempted “any employee employed by any retail or service establishment, more than 50 per centum of which establishment’s annual dollar volume of sales of goods or services is made within the State in which the establishment is located.”  However, in 1990 Congress amended the FLSA to eliminate the § 213 exemption for particular categories of small businesses, and replaced it with an exemption for employers making less than $500,000 in yearly revenue.  Along with this amendment, Congress deleted the definition of “retail or service establishment.”

To clarify, the United States Department of Labor issued regulations defining this statutory term to include “mom and pop” type small businesses that a typical consumer might have expected to encounter in daily life in the mid-twentieth century United States.  These regulations (set forth in part at 29 CFR § 779.316) required that a qualifying business to have a “retail concept” to qualify as a retail or service establishment.  The Department of Labor justified the retail concept interpretation by relying on United States Supreme Court precedent in the Mitchell v. Kentucky Fin. Co., 359 U.S. 290 (1959).  Mitchell held held that certain types of businesses are inherently not retail due to their industry.  The Department of Labor also relied on another Supreme Court decision, Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S. 190 (1966), where the Supreme Court explained that “it is generally helpful to ask first whether the sale of a particular type of goods or services can ever qualify as retail whatever the terms of sale; if and only if the answer is affirmative is it then necessary to determine the terms or circumstances that make a sale of those goods or services a retail sale.”  The Department of Labor, however, never clearly defined what it means to be a “retail concept.”  The applicable Department of Labor regulation, 29 C.F.R. § 779.318, states in pertinent part:

(a) Typically 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. The retail or service establishment performs a function in the business organization of the Nation which is at the very end of the stream of distribution, disposing in small quantities of the products and skills of such organization and does not take part in the manufacturing process. […] Such an establishment sells to the general public its food and drink. It sells to such public its clothing and its furniture, its automobiles, its radios and refrigerators, its coal and its lumber, and other goods, and performs incidental services on such goods when necessary. It provides the general public its repair services and other services for the comfort and convenience of such public in the course of its daily living.

In a related regulation (29 C.F.R. § 779.319), the Department of Labor stated that a business “will not be considered a retail or service establishment within the meaning of the Act, if it is not ordinarily available to the general consuming public.”  The Department further attempted to clarify the definition by listing businesses that have a retail concept, 29 C.F.R. § 779.320, and listing those that do not, 29 C.F.R. § 779.317.  These lists purportedly illustrate which businesses serve the “everyday needs of the community.”  These descriptions mainly are from the viewpoint of mid-twentieth century United States, instead of the rapid economic changes in the late twentieth century through the present.  In the modern economy that includes e-commerce and hybrid e-commerce/”brick and mortar” businesses, the Department of Labor regulations are ambiguous. Although the regulations have not kept pace in bringing clarity in view of the substantial economic changes for businesses and consumers, employers can successfully assert the commission-based exemption based on the evolution of how consumers view “retail” and “services” businesses in the twenty-first century.  This should include businesses that are not traditional “brick and mortar” businesses and instead are web-based businesses.  In the second part of this article, the Mavrick Law Firm discusses application of the commission-based employee overtime wage exemption to web-based and other “non-traditional” businesses.

Peter Mavrick is a Fort Lauderdale employment lawyer who defends and represents businesses and business owners accused of violating Florida and federal employment and labor laws.  This article does not serve as a substitute for legal advice tailored to a particular situation.

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