Under the Fair Labor Standards Act (FLSA), retail and service employees paid primarily on a commission basis can be classified as exempt from overtime pay, as long as the employer is a "retail or service establishment" as defined by the FLSA. However, for a long time, The Department of Labor (DOL) was depending on confusing and vague legislation from the 1960s to define which entities were recognized as retail establishments, creating mass uncertainty for both employers and employees.
Yet, on May 19, 2020, that all changed when the DOL published a final rule clarifying FLSA overtime exemptions for commissioned retail and service workers.
The rule, which took effect immediately, does not impose any new overtime exemption requirements for retail and service establishments. However, retail and service employers that want to use the FLSA overtime exemption for commissioned employees must ensure these four long-standing requirements are met:
- The commissioned individual must be an employee of the retail or service establishment.
- The employee's regular rate of pay must be greater than 1.5 times the applicable FLSA minimum wage.
- Over half of the employee's total compensation "in a representative period" must comprise commissions. This representative period can be as short as one month but not longer than one year.
- The employer must also satisfy the FLSA's "75% of the annual dollar volume of sales" rule in which 75% of the annual dollar volume of sales of goods and services is not for resale and is regarded "as retail sales or services in the particular industry."
If the retail or service employer and employee both fulfill their respective FLSA conditions, then the employee can be classified as exempt. This means that, under federal law, the employee does not have to be paid overtime for hours worked over 40 in a workweek.
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