Pursuant to the Fair Labor Standards Act (“FLSA”), covered employers must generally pay employees overtime pay for hours in excess of 40 hours in one workweek. See 29 U.S.C. § 207(a). There are certain exemptions to the overtime requirements under the FLSA. One exemption applies to certain employees who work at a retail or service establishment. If an employer classifies employees as exempt under the retail sales exemption, the employer should understand whether it is properly classifying the employees as exempt and how Minnesota law may require payment of overtime in certain circumstances.
The Retail Sales Exemption under the FLSA
In order to be exempt from the overtime requirements under the FLSA, the law requires that the employee:
- must earn at least one and one-half times the federal minimum wage;
- must earn more than half of his or her salary in commissions for a representative period not less than one month; and
- must work for a retail or service establishment.
One and One-Half Times the Federal Minimum Wage
In order to establish the retail sales exemption under the FLSA, the employer must first prove that the employee earned at least one and one-half times the federal minimum wage. See 29 U.S.C. § 207(i). The federal minimum wage is currently $7.25 per hour. See U.S. Department of Labor and Industry, Wage and Hour Division Minimum Wage Chart. As a result, 1.5 times the federal minimum wage is $10.88 per hour.
More Than Half of Salary in Commissions for a Representative Period Not Less Than One Month
The second element the employer must prove is that the employee earned more than half of his or her salary in commissions for a representative period not less than one month. See 29 U.S.C. § 207(i).
The FLSA definition of “commissions” is somewhat vague. See 29 C.F.R. § 779.416. The FLSA regulations provide that:
The express statutory language of section 7(i), as amended in 1966, provides that “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” which may be paid to the employee.
29 C.F.R. § 779.416(b). The FLSA regulations state that where an employee always earns the same fixed amount for each workweek, or where the employee receives a regular payment representing a percentage of the sales that the establishment can always be expected to make, the employee does not earn a bona fide commission and will not qualify for the exemption. See 29 C.F.R. § 779.416(c). This means that if an employee earns regular commissions based on a stable number of hours or sales per workweek, that the employee may not meet this element of the exemption.
The FLSA regulations provide that a representative period is “a period which can reasonably be accepted by the employer, the employee, and disinterested persons as being truly representative of the compensation aspects of the employee’s employment on which this exemption test depends” and “a period which typifies the total characteristics of an employee’s earning pattern in his current employment situation, with respect to the fluctuations of the proportion of his commission earnings to his total compensation.” 29 C.F.R. § 779.417(a). The period must be as recent a period, of sufficient length to fully and fairly reflect all such factors, as can practicably be used. 29 C.F.R. § 779.417(b). Additionally, the period “should be long enough to stabilize the measure of the balance between the portions of the employee’s compensation which respectively represent commissions and other earnings, against purely seasonal or plainly temporary changes.” 29 C.F.R. § 779.417(c). For each exempted employee, an appropriate representative period or a formula for establishing such a period must be chosen and must be designated and substantiated in the employer’s records. 29 C.F.R. § 779.417(d).
Employee Must Work for a Retail or Service Establishment
The final element that the employer must show in order for the exemption to apply is that the employee works for a “retail or service establishment” as that term is defined under the FLSA.
Pursuant to Section 779.24, a “retail or service establishment” is:
(a) [A]n establishment;
(b) 75 per centum of whose annual dollar volume of sales of goods or services (or of both) is not for resale; and
(c) recognized as retail sales or services in the particular industry.
See 29 C.F.R. § 779.24.
According to the regulations, an “establishment” is a distinct, physical place of business, see 29 C.F.R.§§ 779.23, 779.303, while an “enterprise” is the largest unit of corporate organization and “includes all such activities whether performed in one or more establishments or by one or more corporate or other organizational units . . . .” 29 U.S.C. §§ 203(r)(1) & (s). Because the regulations interpret the term “establishment” as a distinct physical location, employees who travel from location to location servicing customers cannot themselves qualify as “establishments” as contemplated by the statute. See 29 C.F.R. § 779.23.
The regulations go on to explain that “an establishment, wherever located, 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.” 29 C.F.R. § 779.319. Thus, the distinguishing characteristic of an “establishment,” aside from a dedicated, physical space, is public accessibility. The DOL explains that “[a]n establishment . . . does not have to be actually frequented by the general public in the sense that the public must actually visit it and make purchases of goods or services on the premises in order to be considered as available and open to the general public.” 29 C.F.R. § 779.319. For instance, a “refrigerator repair service shop . . . is available and open to the general public even if it receives all its orders on the telephone and performs all of its repair services on the premises of its customers.” Thus, telephone contact is sufficient to satisfy the public accessibility requirement.
The “establishment” analysis for employers will center around whether the employee works out of a fixed location (even if the employee works away from the employer’s premises) and whether the employee was readily available for direct, two-way communication with the public through a wide range of communication devices, such as cell phone and e-mail.
2. 75% of Annual Sales are not for Resale
The second element of a retail or service establishment is that 75% of its annual dollar volume of sales of goods or services (or of both) is not for resale. See 29 C.F.R. § 779.24. In determining whether goods or services are sold for resale, “sale” means “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” 29 C.F.R. § 779.331. “A sale is made for resale where the seller knows or has reasonable cause to believe that the goods or services will be resold, whether in their original form, or in an altered form, or as a part, component or ingredient of another article.” 29 C.F.R. § 779.331.
3. Recognized as “Retail Sales or Services”
The definition of “retail or service establishment” in § 213(a)(2) requires that 75% of the business’s goods or services be “recognized as retail sales or services in [its] particular industry.” See Mitchell v. Ky. Fin. Co., 359 U.S. 290, 291 (1959). In Idaho Sheet Metal Works, Inc. v. Wirtz, the Supreme Court held that the meaning of “retail” is to be determined by the courts, not only by the defendant or the defendant’s industry. 383 U.S. 190, 204-05 (1966).
The regulations list a number of possible retail establishments, ranging from “antique shops” to “watch, clock and jewelry repair establishments.” 29 C.F.R. § 779.320. The DOL regulations articulate the characteristics of a retail or service establishment as follows:
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.
29 C.F.R. § 779.318(a). Courts have stated that, “the typical retail transaction is one involving goods or services that are frequently acquired for family or personal use.” Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S. 190, 203 (1966).
In order to be covered by this exemption, the employer will need to show that its business is recognized as retail. Generally, this means the employer will perform a function at the end of the stream of distribution, disposing of products in small quantities and not taking part in the manufacturing process.
Warning for Employers: No Retail Sales Exemption Under Minnesota Fair Labor Standards Act
The Minnesota Fair Labor Standards Act requires that employers pay employees overtime pay for any hours worked over 48 in one workweek. See Minn. Stat. § 177.25. (The federal FLSA requires employers to pay overtime for any hours worked over 40 in one workweek.) The MFLSA exempts employees who are in executive, administrative, or professional capacities from overtime pay requirements. See Minn. R. §§ 5200.0190, 5200.0200, 5200.0210. The MFLSA also has a limited number of additional exemptions, including healthcare employees, motor vehicle salespeople, certain mechanics, and constructors of on-farm silos. See Minn. Stat. § 177.25.
However, in contrast to the FLSA, the MFLSA does not contain a retail sales exemption. This means that employees who may be covered by the FLSA retail sales exemption may still be owed overtime pay for hours worked over 48 each week (unless the employee qualifies for another exemption under the MFLSA).
If your company has a sales force it is currently classifying as exempt under the retail sales exemption and you would like assistance conducting an internal audit of your salesperson classification system, contact any of the Trepanier MacGillis Battina P.A. employment law attorneys.
Minnesota employment law attorney Craig W. Trepanier has extensive experience representing employers and employees in matters involving wage and hour regulations, overtime pay, and misclassifications under the FLSA and MFLSA. Craig may be reached at 612.455.0502 or firstname.lastname@example.org. Trepanier MacGillis Battina P.A. is a Minnesota wage and hour law firm located in Minneapolis, Minnesota.