FLSA2020-10 — Application of the retail or service commission sales exemption under Section 7(i) of the FLSA, where more than half of an employee's compensation in the relevant representative period ultimately does not consist of commissions.

U.S. Department of Labor Wage and Hour Division
Washington, DC 20210

FLSA2020-10
June 25, 2020
Dear Name*:
This letter responds to your request for an opinion concerning the application of the retail or
service commission sales exemption from the Fair Labor Standards Act’s (FLSA) overtime pay
requirements. This opinion is based exclusively on the facts you have presented. You represent
that you do not seek this opinion for any party that the Wage and Hour Division (WHD) is
currently investigating or for use in any litigation that commenced prior to your request.
BACKGROUND
Your letter states that your client is involved in the retail sale of home furnishings to the public in
small stores employing two to five employees. Your client pays most salespersons commissions
that afford them substantial earnings. The letter adds that where it is clear a salesperson will not
earn substantial commissions, your client pays the employee hourly with overtime for hours
worked over 40 in any workweek.

Your letter asks what obligation an employer incurs when it attempts to use the overtime
exemption for a retail or service establishment in Section 7(i) of the FLSA, 29 U.S.C. § 207(i),
but more than half of an employee’s compensation in the relevant representative period
ultimately does not consist of commissions. In particular, you are concerned with two scenarios:
(1) the opening of a new store where the sales volume is unknown; and (2) the hiring of a new
salesperson with no sales-performance record. The letter states that your client hires
salespersons in these situations as commissioned employees subject to Section 7(i)’s exemption
and guarantees compensation at one and one-half times the applicable minimum wage for all
hours worked during a representative period. You state that your client tracks the sales and
commissions of the salesperson, but the commissions requirement is met in some weeks but not
in others. Therefore, your client cannot determine whether more than half of the compensation
that the salesperson will receive by the end of the full representative period will consist of sales
commissions at the end of the representative period.

GENERAL LEGAL PRINCIPLES
The FLSA Section 7(i) exemption applies if: (1) the employee is employed by a retail or service
establishment; (2) the employee’s regular rate of pay exceeds one and one-half times the
minimum hourly rate; and (3) more than half of the employee’s compensation for a
representative period (not less than one month) consists of commissions on goods or services. 29
U.S.C. § 207(i); 29 C.F.R. § 779.412. “Section 7(i) was enacted to relieve an employer from the
obligation of paying overtime compensation to certain employees of a retail or service
establishment paid wholly or in greater part on the basis of commissions.” 29 C.F.R. § 779.414.

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One court has explained that the exemption is aimed at benefitting both employers and
employees:

The § 7(i) exemption was designed to address inequities that can arise in paying
overtime to commissioned employees. Service specialists, who are paid on a
commission basis and are able to set their own schedules, can work fewer hours in
one week and more in the next. If they received overtime, employees could
compress their hours into one week (e.g., work 60 hours) to obtain overtime pay,
and then coast during the next week (e.g., work 10 hours). By doing so,
employees would end up working fewer hours than a regular employee working
two forty hour work weeks, but yet earn more.

English v. Ecolab, Inc., No. 06-CIV-5672 (PAC), 2008 WL 878456, at *16 (S.D.N.Y. Mar. 31,
2008).

The Supreme Court has held that exemptions under the FLSA deserve a “fair (rather than a
narrow) interpretation” because the exemptions are “as much a part of the FLSA’s purpose as the
overtime-pay requirement.” Encino Motorcars, LLC v. Navarro, 138 S. Ct. 1134, 1142 (2018)
(internal quotation marks and citation omitted). “And that is as should be expected, because
employees’ rights are not the only ones at issue and, in fact, are not always separate from and at
odds with their employers’ interests.” Sec’y U.S. Dep’t of Labor v. Bristol Excavating, Inc., 935
F.3d 122, 135 (3d Cir. 2019) (citing Encino). Accordingly, WHD must apply a “fair reading”
standard to all exemptions to the FLSA—including the Section 7(i) exemption.
OPINION
For purposes of this letter, we assume that your client qualifies as a retail or service
establishment, see 29 C.F.R. §§ 779.24, .313, that it pays employees a regular rate exceeding one
and one-half times the current federal minimum wage of $7.25 in a workweek in which the
employee worked overtime hours, and that the commissions paid to your client’s employees are
bona fide commissions based on the provision of goods or services that the establishment sells,
see 29 C.F.R. §§ 779.413‒.416.

Your letter describes a scenario in which there is no prior established representative period and
instead the employer is starting a representative period for a new employee or a new store
simultaneously with using the Section 7(i) exemption. While this scenario is not explicitly
addressed in the regulations, nothing in the FLSA prohibits doing this.

Indeed, WHD addressed similar circumstances in a 1981 opinion letter, which recognized that an
employer may use Section 7(i) “simultaneously with the commencement of the representative
period.” WHD Opinion Letter FLSA-897 (Apr. 16, 1981) (copy enclosed). The letter made
clear, however, that if an employer chooses to do this and, at the conclusion of that initial
representative period, Section 7(i)’s requirement that commissions constitute more than half of
compensation for a representative period has not been satisfied, the employer must pay overtime

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premium compensation for any overtime hours worked during that period.
1
Consistent with the
1981 opinion letter, the employer could again attempt to establish a representative period for the
new employee and simultaneously claim the Section 7(i) exemption for that employee on a
prospective basis.

This letter is an official interpretation of the governing statutes and regulations by the
Administrator of the WHD for purposes of the Portal-to-Portal Act. See 29 U.S.C. § 259. This
interpretation may be relied upon in accordance with section 10 of the Portal-to-Portal Act,
notwithstanding that after any such act or omission in the course of such reliance, the
interpretation is “modified or rescinded or is determined by judicial authority to be invalid or of
no legal effect.” Id.
We trust that this letter is responsive to your inquiry.

Sincerely,

Cheryl M. Stanton
Administrator
Enclosure
*Note: The actual name(s) was removed to protect privacy in accordance with 5 U.S.C.
§ 552(b)(7).

1
Id.; see also WHD Opinion Letter FLSA2005-53, 2005 WL 3308624, at *2 (Nov. 14, 2005) (concluding that when
information is insufficient “to determine whether the employees receive[d] more than half of their earnings in a
representative period from [commissions] ... we are unable to determine whether they qualify for exemption”).