In the past week, the U.S. Department of Labor (DOL) has issued new final rules that provide greater flexibility to retail industry employers that want to claim an overtime exemption for employees who receive at least half of their compensation through commissions, and that permit employer’s to use a “fluctuating work week” method of payment even if it pays employees periodic bonuses or similar payments, including commissions, premium pay or hazard pay, in addition to a set weekly salary.

Rule Regarding “Retail Concept”

Provisions in the Fair Labor Standards Act (FLSA) allow employers in retail and service industries to treat employees paid primarily on a commission basis as exempt from overtime. In 1961, the DOL introduced as an interpretive rule, a lengthy but non-exhaustive list of 89 types of establishments that it viewed as lacking a “retail concept” that, therefore, could not claim the exemption for commissioned employees. In the same interpretive rule, it also included a separate non-exhaustive list of 77 types of establishments that “may be recognized as retail.” In 1970, the DOL added another 45 establishments that it viewed as lacking a “retail concept.” The list of establishments that lack a “retail concept” included businesses in various industries such as dry cleaners, tax preparers, laundries, roofing companies, travel agencies, blue printing and photostating establishments, stamp and coupon redemption stores, and telegraph companies. The “may be” retail list included establishment in industries such as coal yards, fur repair and storage shops, household refrigerator service and repair shops, masseur establishments, piano tuning establishments, reducing establishments, scalp-treatment establishments, and taxidermists.

On May 19, 2020, the DOL withdrew both lists. Going forward, the DOL will apply the same analysis to all establishments to determine whether they have a retail concept and qualify as retail or service establishments (if they sell goods or services to the general public and if they serve the everyday needs of the community in which they are located), permitting establishments in industries that had been on the non-retail list to assert that they do, in fact, have a retail concept and, if they meet the existing definition of retail and other criteria, to qualify for the exemption. The added flexibility will permit industries that had been on the “no retail concept” list to consider whether a commission-based pay arrangement is appropriate for its employees. The DOL believes that a more flexible, fact-based analysis is better suited to account for newly developed industries as well as developments in industries over time regarding whether companies are retail or not.

Fluctuating Workweek

On May 20, 2020, the DOL announced a final rule that will give employers greater flexibility to use the fluctuating workweek method of calculating overtime pay for salaried, nonexempt workers whose hours vary from week to week. The fluctuating workweek method is an alternative to the Fair Labor Standards Act’s regular method of calculating overtime pay, under which employees are paid an hourly wage and receive 1.5 times their regular rate of pay for overtime hours. To use the fluctuating workweek method, employees’ hours actually have to change week to week, and employees must receive a fixed salary even when they work less than their regularly scheduled hours. Additionally, there must be a clear understanding between the business and employees about how workers are paid. With this method, an employee who is entitled to overtime pay receives a fixed weekly salary, which is divided by the number of hours the employee actually worked in the week to determine the week’s base hourly rate. The employee will then receive an additional 0.5 times their base rate for each hour worked beyond 40 in the workweek.

Prior to the new rule, employers generally could not use the fluctuating workweek method to calculate overtime pay for employees who receive pay such as bonuses and other incentive-based pay in addition to the guaranteed salary. Under the amended Rule, employers can pay bonuses, premium payments or other additional pay, such as commissions and hazard pay, to employees without jeopardizing their ability to use the fluctuating workweek method of compensation. Employers must keep in mind, however, that any compensation that is paid in addition to the fixed salary under the fluctuating workweek method will still have to be included in the regular rate of pay for overtime calculations.

It is also important to check state law before utilizing a fluctuating workweek method. Some states, such as Alaska, California, New Mexico and Pennsylvania, do not allow employers to use the fluctuating workweek method at all, and other states have not addressed its use.

If you have any questions, please contact Nancy Abrams at nabrams@sgrvlaw.com or (215) 241-8894.