Does an employer’s business qualify as a “retail or service establishment” for the purpose of satisfying the exemption requirements of section 207(i) of the federal Fair Labor Standards Act?  The answer to this question might have just changed based on the Department of Labor’s (DOL) recent regulatory action. 

Since 1961, the answer was often determined by an “incomplete, arbitrary, and essentially mindless catalog” of establishments that the DOL identified as falling within or outside what it deemed a retail or service establishment.  On May 8, 2020, the DOL withdrew the regulations that included those lists, acknowledging that there was never any “explanation why any of the listed industries were included.”  Many courts have criticized the DOL for lacking any cohesive criteria or bases for determining which establishments “lack a retail concept,” and which “may be recognized as retail.”  Other courts deferred to the DOL’s regulations in their analysis. Now, every establishment will be evaluated equally under a single analytical framework, without the burden or the benefit of being included on the DOL’s lists. 

Section 7(i) Exemption

Section 207(i) of the FLSA (“7(i)”) is meant to relieve employers in retail and service businesses from the obligation to pay overtime to certain commission-based employees.  In 1961, the DOL issued 29 CFR Part 779 as an interpretive rule, including subpart D, entitled “Exemptions for Certain Retail or Service Establishments.”  As part of this interpretive rule, the DOL introduced a lengthy, but non-exhaustive, list of 89 types of establishments “to which the retail concept does not apply.”  In 1970, the DOL added another 45 establishments to that list for a total of 134 establishments that could not satisfy 7(i)’s requirements because they (in the DOL’s view) could not be considered “retail” businesses.  The types of establishments include loan and credit agencies, dry cleaners, accountants, medical and dental offices, law firms, pharmacies, employment agencies, gambling establishments, income tax preparers, travel agencies, waste removal, HVAC, building and other contractors, warehouses, transportation companies, and sellers of machinery and equipment. 

At the same time, the DOL introduced a non-exhaustive list of 77 types of establishments that may be recognized as retail.  These included auto dealers, car washes and repair shops; salons; bowling alleys; cafeterias; drug, fur, antique, china, appliance, cigar, hardware, sporting good, jewelry and other shops; restaurants, florists, hotels, and cemeteries.  Again, the DOL acknowledges that there was no explanation for why certain establishments were on either list and that courts, after comparing the two lists, concluded that there was “no generating principles or cohesive criteria underlying the distinction between business” on the two lists.¹

Lists Withdrawn, Single Analysis to be used for All “Retail” Businesses

Effective immediately, the DOL has withdrawn both lists found at 29 CFR 779.317 and 779.320.  In doing so, business establishments that were once excluded may now be considered as offering a “retail” product or service and therefore qualify for the exemption.  Similarly, employers will no longer be able to point to the DOL’s list of “qualified” retail businesses to satisfy 7(i)’s requirements.  The withdrawal of these lists is meant to ensure all businesses are treated consistently by using a single analysis to determine whether a business is a retail or service establishment eligible for the exemption.  Using a single analysis better accounts for changes in an industry’s characteristics that occur over time that render a particular business to be “retail” in character. 

The regulatory change imposes no new requirements.  The single analysis will now be conducted using the remaining part of the same interpretive rule, merely without reference to the two lists.  The definition of “retail or service establishment” remains unchanged—“an establishment 75 per centum of whose annual dollar volume of sales of goods or services (or of both) is not for resale and is recognized as retail sales or services in the particular industry.”  A retail or service establishment sells goods or services to the general public, and serves the everyday needs of the community in which it is located and operates at the very end of the stream of distribution, selling in small quantities to an end user disseminated in a manner similar to other consumer goods and services.  To be considered a retail or service establishment, the business should ordinarily be accessible by the general consuming public. But, that does not require the public to actually frequent a physical location.  Being available by phone or online suffices. 

Parts of the DOL’s rule continue to maintain that certain business operations like insurance or power companies do not have a concept of retail selling or servicing and, therefore, will not qualify for the exemption.  Commenting on the withdrawal of the lists, the DOL noted that a particular industry may gain or lose retail characteristics as the economy develops and modernizes.  At the same time, however, the rule in Part 779 continues to advise that the term retail is “alien to some businesses,” and the DOL points to legislative history from 1949, as well as subsequent judicial pronouncements, to support the position that certain establishments have not been traditionally regarded as retail, and therefore, cannot satisfy 7(i)’s requirements.

Once an employer determines it operates a retail or service establishment, it can determine whether any of the employees of that establishment may qualify as exempt from statutory overtime, based upon the manner of their compensation.  To avoid the overtime requirement, employees must receive more than half of their pay in the form of bona fide commissions on goods or services.  The employer may use a representative period of one month, up to as long as one year, to measure compliance with this requirement.  The employee’s regular rate for each hour worked must also exceed one and one-half times the minimum wage. 

In some cases, the DOL’s list of establishments lacking a retail concept in Part 779 presented an insurmountable obstacle to an employer seeking to apply this overtime exemption for certain employees paid primarily on a commission basis.  In many ways, the lists seemed anachronistic; businesses such as “blacksmiths” and “toll bridge companies” lacked a retail concept, but “fur shops” and “trailer camps” qualified as retail.  The DOL’s recent action represents an effort to bring the rule’s application into the 21^st century, but employers must still consider 7(i)’s complicated legislative history, as reflected in the remaining regulations in Part 779, when evaluating whether their business can be characterized as “retail.”