The U.S. Department of Labor (“DOL”) issued a new final rule on May 19, 2020 recasting the Fair Labor Standard Act’s (“FLSA”) inside sales exemption, Section 7(i). This new rule – which took effect immediately – repeals two lists that the DOL used for decades to interpret the exemption. The first list categorized businesses which lacked “retail concept,” thus disqualifying the business from the exemption; the second list denoted establishments which “may be recognized as retail.” Now, in lieu of operating from these static lists, the DOL will instead evaluate businesses on a case-by-case basis to determine if they qualify for the exemption. The withdrawal of these lists expands the inside sales exemption to cover many industries and businesses that were categorically unable to qualify for the exemption under the previous rules.

Background

The FLSA’s inside sales overtime exemption applies to employees who satisfy each of the following conditions:

1. The employee must be employed by a retail or service establishment;

2. The employee’s regular rate of pay must exceed one-and-one-half times (1.5x) the minimum wage for every hour worked in a workweek in which any overtime hours are worked; and

3. More than half of the employee’s total earnings in a representative period (of at least one month) represents commissions.

Here, a “retail or service establishment” is one where 75% of the annual sales are not for resale, and that is recognized as retail sales or service establishment in the particular industry. A retail establishment usually sells goods and services to the general public, serves the everyday needs of the community, is at the very end of a stream of distribution, disposes its products and skills in small quantities, and does not take part in the manufacturing process. More than 70 years ago, the DOL established the non-exhaustive exclusion list (discussed above) which specified 89 industries and businesses that did not qualify as a “retail concept.” Since these businesses could not meet the first prong of the exemption criteria, they were prevented from using the inside sales exemption.

Impact of the Withdrawal

With the restrictive list now withdrawn, the DOL intends to treat all business equally regardless of industry and evaluate their eligibility for the exemption under the same standard. This is a significant change, since large industries such as accounting firms, banks, real estate companies, and dental offices (among many others) might now have employees who qualify for the inside sales exemption. The withdrawal of the other list of businesses which “may have qualified as retail” also reduces confusion, since a business’s inclusion in this list often did not affect whether the business ultimately qualified as “retail” under the exemption.

It is important to note that this new rule does not establish a new standard, impose any new requirements, or provide additional guidance on how industries formerly shut out of the inside sales exemption will be reviewed. Businesses with employees who may now potentially qualify for the inside sales exemption should consult with counsel to determine the effect of this rule’s withdrawal on their workforce.

In addition, remember that local wage and hour laws might also affect this analysis. For example, as Massachusetts does not have an inside sales exemption equivalent to the FLSA’s, Massachusetts employees are still subject to the state’s overtime pay requirements even if they potentially qualify for the federal exemption.

Moving forward, DOL opinion letters might provide valuable insights into whether or how different industries can qualify for this exemption. Additionally, in its withdrawal notice, the DOL explicitly recognized that industries progress and change over time, and thus a business might evolve to have a “retail concept” it did not formerly possess. The new rule is in effect immediately, so affected businesses can immediately begin the process of determining whether the broadened exemption applies to their workforce.