Retail or Service Establishment Exemption2018-09-12T12:52:51+00:00

The retail or service establishment exemption has three main components the employer must prove in order to avoid paying overtime pay under the FLSA.

First, the employer must be a retail or services establishment whose goods or services are sold to the general public.

Second, more than half of the employee’s total earnings must come from commissions. In addition, the employee’s total pay for every workweek must exceed $10.88 per hour when dividing the pay received by the total hours worked.

Third, the employer must have an agreement with the employee regarding the application of this exemption, must keep records of total hours worked per week, and must make special notations on the payroll records of employees subject to this exemption.

1. The Employer Must be a Retail or Service Establishment

First, the employer must be a “retail or service establishment.” While that can include many different businesses, 75 percent of the employer’s annual dollar volume of sales of goods or services (or both) cannot be for resale. The type of business must also be recognized as retail sales or services in the particular industry.

Generally the employer cannot be a “middle man” warehouse supplier, but instead must be engaged in retail sales to the end customer. An example of a retail or services establishment would be a department store in a mall. An example of a business that would not be a retail or services establishment is the product supplier or manufacturer of the shoes or clothes sold at that department store. In short, the business must have the “retail concept” where its goods or services are sold to the general public.

2. The Employee Must Receive Certain Types of Pay

Assuming the employer can show that it is a retail or services establishment, then it must next prove that:

  1. More than 50% of the employee’s pay is based on commissions from sales.
  2. The employee is paid time and one-half the minimum wage rate for each hour worked in each seven-day workweek. The current FLSA minimum wage rate is $7.25 per hour, meaning the employee must be paid at least $10.88 for each weekly hour worked when dividing all pay received by all hours worked for that week.

Also, tips paid to employees cannot be considered commissions under this exemption.

3. There Must Be an Agreement for this Exemption to Apply and the Employer must Keep Certain Records.

In order for the retail or services establishment exemption to apply, regulations state that the employer must:

  1. Have an agreement or understanding with the employee that the retail or services establishment exemption applies.
  2. Keep an accurate record of all hours worked each workweek.
  3. Have a “symbol, letter, or other notation” placed on the payroll records of each employee who is paid subject to this exemption.

If you are in the retail or service industry and have any question as to whether you are receiving proper compensation, get in touch with Baron & Budd. Contact us online or call 866-238-4143.

Example 1:

An employee works at a department store selling shoes. The employee is paid $12.00 per hour and generally works 50 hours per week. The employee is also paid commissions on sales. In a given year, the employee is paid hourly pay of $30,000 and commissions of $25,000 for total annual wages of $55,000. The employee is not exempt from the FLSA’s overtime wage law under the retail or services establishment exemption because only 45% of his/her annual wages came from commissions which is less than the “greater than 50%” commission pay requirement. This employee must generally be paid overtime wages for all hours worked over 40 per workweek, and that overtime pay must be calculated using both the hourly pay and the commission pay. If the commission pay is received after the pay date for the sales made, the employer must retroactively pay additional overtime pay that includes those commissions. This example assumes the third test above on employer records is met.

Example 2:

An employee works at a sporting goods store that sells products to the general public. The employee is paid $11.00 per hour and works 50 hours per week. The employee also receives commissions on goods sold to customers. In a given year, the employee is paid $23,000 for hourly wages and $24,000 in commissions for total annual wages of $47,000. That employee is not entitled to overtime pay as he/she likely meets the retail or service establishment exemption. First, the employee is paid more than the minimum of $10.88 for each hour worked per seven-day workweek. Second, the employee’s commission pay of $24,000 is 51% of his/her annual pay thus meeting the requirement that commission pay be more than 50% of the total pay. This example assumes the third test above on employer records is met.

Example 3:

An employee works at a store that sells furniture to the general public. The employee is paid on a commission only basis and generally works 50 hours per week. The employee does not receive hourly or salary pay. In a given year, the employee is paid total wages of $45,000 based on those commissions. However, there are some workweeks in which the employee’s total wages, when divided by the hours worked, equals $8.00 per hour and other weeks where it equals $12.00 per hour. The employer must pay the employee overtime wages for weeks where the average hourly pay is $8.00 because the average pay must be greater than $10.88 (time and one-half the minimum wage rate) for this exemption to apply. However, in the weeks where the average hourly pay is $12.00 per hour, no overtime wages are owed because the retail or service establishment exemption applies in those weeks. This example assumes the third test above on employer records is met.