On the last full day of the Trump administration, the Department of Labor’s Wage and Hour Division (WHD) clarified that staffing firms can qualify as “retail or service establishments” under FLSA section 7(i).  Prior to May 2020, staffing firms were expressly excluded from taking advantage of the 7(i) exemption.  This WHD opinion letter removes uncertainty whether staffing firms that recruit, hire and place employees on temporary assignments can qualify as “retail or service establishments” so that its employees are exempt from the FLSA’s overtime requirements.

The section 7(i) exemption only applies to employees (1) who work at a retail or service establishment; (2) whose regular rate of pay exceeds one and one-half times the applicable minimum wage; and (3) whose earnings in a representative period are composed of more than 50% commissions.¹  After nearly 60 years of excluding staffing firms from this exemption, the WHD now makes clear that staffing firms can be “retail or service establishments” and have the exemption apply to its employees, provided the other elements are satisfied.  

In determining that staffing firms can be “retail or service establishments” the WHD considered whether (1) such firms engage in the making of sales of goods or services; (2) they have 75% of their sales of goods or services, or of both, recognized as retail in the particular industry; and (3) 25% of their sales of goods or services, or of both, are sales for resale.²    

Engaged in the Making of Sales of Goods or Services

Staffing firms satisfy the “sales of goods or services” by providing temporary staffing and permanent recruitment services. The WHD cited several cases and a previous opinion letter³ for the position that sales of services to a commercial entity does not change the conclusion that sales are being made, thereby satisfying the first element.

75 Percent of Sales of Goods or Services Must Be Recognized as Retail

This second element requires that 75% of whatever the business sells is recognized by the industry as retail and that the business have a retail concept.  The WHD punted on the first component, merely acknowledging that a trade association, such as the one that requested this opinion letter, or other industry experts are in the best position to know and prove whether providing temporary staff is viewed by the industry as a retail service.    

Since 1961, the WHD determined staffing firms lacked a retail concept, categorically denying them the ability to utilize this exemption.  The WHD eliminated its 1961 regulation in May 2020 and has since determined that numerous businesses previously on that list qualify for the exemption.⁴  The WHD found sales of staffing firms to commercial clients to be retail in nature, analogous to providers of window-washing services, commercial pest elimination services, and commercial computer training services. 

A retail or service establishment is defined as one that:

• sells goods or services to the general public
• serves the everyday needs of the community in which it is located
• performs a function that is at the very end of the stream of distribution
• disposes in small quantities the products and skills it sells, and
• does not take part in the manufacturing process.

The WHD addressed each of these factors in turn. The WHD noted that staffing firms may provide services to businesses in the general public, which serves the employment needs of the community.  The WHD accepted that a typical staffing firm places workers with business at the end of the stream of distribution and does not place workers in bulk.  And, the WHD acknowledged that staffing firms do not engage in manufacturing.

Not Over 25 Percent of Sales of Goods or Services May Be For Resale

The third element involves the reselling of services, which cannot exceed 25% of sales.  Resale of services in the staffing industry is generally limited to situations in which a staffing firm pays a fee to a second staffing firm or outside recruiter for procuring a worker who the first firm places with a customer.  So long as those transactions represent less than 25% of sales, this element is likely met.   

Takeaways

For the first time since 1961, staffing firms have guidance suggesting that they may be retail or service establishments under section 7(i) such that their employees earning more than 50% of their wages from commissions with total wages exceeding 1.5 times minimum wage may be exempt from overtime.  As this opinion letter was issued on the eve of President Biden’s inauguration, the guidance might be withdrawn.  Staffing firms should consult counsel to determine the extent the exemption and state equivalents could apply to their workers.