Under Section 7 of the Fair Labor Standards Act employees are entitled to one and a half times their hourly wage for every hour over forty hours a week. One of the exemptions under the FLSA section 7(i) though deals with retail service employees in certain circumstances.
There are three main requirements for the employee to be exempt from overtime pay:
- Must work for a retail or service establishment
- Their regular rate of pay exceeds one and a half times the minimum hourly wage
- More than 50% of their compensation must be paid through commissions on goods and services during a representative period
The two main points disputed are the exact definition of a retail or service establishment and how to pay the employee through commission. Under this Act "establishment" means a physical location accessible to the public that sells good or services to the general public and takes no part in the manufacturing process. In English v. Ecolab the defendant was still considered as working at an establishment since working from home meant their home was the physical location and it was available to the public through telephone and internet access. Ecolab was also considered retail even though they were commercial exterminators since they served the everyday needs of the community and were at the end of the stream of commerce. On the other hand, Kentucky Finance Co., a company that sold small personal loans, got a different ruling. Like most financial and insurance sales they are not considered as retail. To be considered for the retail definition 75% of the company's annual sales of good and services must not be for resale and should be recognized as retail sales or services in their particular industry. Items that count as "for resale" include ice that is later used in drinks served at a restaurant but notice that is used to keep food fresh. The item sold must be at the end of the stream of commerce, can be used in conducting business but not altered and resold.
For a partial list of non-retail establishments visit: http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr;sid=f369e33059f9ae593d90f9ed4d72d657;rgn=div5;view=text;node=29%3A220.127.116.11.40;idno=29;cc=ecfr#29:18.104.22.168.40.4.274.18
The second prong of the exemption relates to the commissions. Satisfaction of the exemption can be met in countless combinations but must involve over half of the employee's pay coming from commissions. To count as a commission there must be a relationship between the amount charged to the customer and the amount paid to the employee. Employers can lawfully pay employees solely on commission. Employer can also factor in a base rate plus commission. However, employers must bolster the pay rate for a certain pay period if the pay rate during the period of time falls below the minimum wage, meaning that the amount of the commissions was insufficient to equate to receiving the state or federal minimum wage for the period at issue.
One example of a commission pay plan ruled acceptable is Horn v. Digital Cable & Communications, Inc. where the cable installers received a percentage of what the customer was charged for each installation. Another company called "Pep Boys" violated the law by failing to include any proportionality between employee compensation and customer price which led to their pay not counting as a commission. The employer is faced with the burden to prove the hours worked by employees as proof in wage claims. Therefore, an employer must maintain accurate records of hours worked and earnings and wages paid to prove they qualify for this exemption.
If you have any questions about this type of exemption contact us today at Feldman Morgado.