Effective Tuesday, May 19, 2020, the Department of Labor issued a new rule to provide greater simplicity and flexibility to retail and service-industry employers. The rule relaxes the regulatory framework underpinning Section 7(i) of the Fair Labor Standards Act, also known as the “retail service exemption.” The rule allows employees who are employed in a retail or service establishment and who receive a significant portion of their income via commissions to be exempted from the law’s overtime requirements.

The rule removed two provisions from the department’s Wage and Hour Division regulations. The first provision removed contained a list of industries that the department viewed as having “no retail concept.” Industries on the first list were deemed by the department to be per se ineligible to utilize the retail service exemption. The second provision removed contained a non-exhaustive list of industries that “may be recognized as retail,” and were potentially eligible for the exemption.

By removing these two lists, employers in industries that were previously included on the “no retail concept” list may now assert that they maintain a “retail concept,” so long as 75 percent of their 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. Further, employers may be able to claim overtime exemptions for any of their employees who meet the following criteria: (i) The employee's regular rate of pay must exceed one-and-one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked; and (ii) more than half the employee's total earnings in a representative period must consist of commissions.

The department’s immediate removal of these provisions is further evidence of its current approach to remove regulatory barriers that may have dissuaded employers in retail and service industries from previously seeking overtime exemptions in the past. The new guidance also provides newly qualifying employers flexibility to work with employees on commission-based pay arrangements to legally obtain the cost savings of the exemption.

Amid the COVID-19 pandemic, this regulatory change arrives at a unique time in which retail and service establishments are gradually reopening their doors and looking to cut costs wherever they can. As retail and service establishments return employees to work, they should consider whether adopting more commission-based pay is a sensible approach in light of the new regulatory guidance.