Employment Law Note: The Section 7(i) Exemption for Commissioned Employees under the Fair Labor Standards Act

DW Law Exemption for Commissioned EmployeesCertain commissioned employees in a “retail or service establishment” are exempt from overtime pay under Section 7(i) of the Fair Labor Standards Act (“FLSA”). A “retail or service establishment” is “an establishment 75% of whose 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”. Section 13(a)(2). The Overtime Exemption for Commissioned Retail Employees is contained in Section 7(i) of the FLSA.

Test

Section 7(i) (“Employment by retail or service establishment”), provides that:

No employer shall be deemed to have violated subsection (a) of this section by employing any employee of a retail or service establishment for a workweek in excess of the applicable workweek specified therein, if:

  1. the regular rate of pay of such employee is in excess of one and one-half times the minimum hourly rate applicable to him under section 206 of this title, and
  2. more than half his compensation for a representative period (not less than one month) represents commissions on goods or services. In determining the proportion of compensation representing commissions, all earnings resulting from the application of a bona fide commission rate shall be deemed commissions on goods or services without regard to whether the computed commissions exceed the draw or guarantee.

See also CFR §§779.410 to 779.421. Each of the above conditions must be met for the overtime exemption to apply. If all the above conditions are not met, the Section 7(i) exemption is not applicable, and overtime premium must be paid for all hours worked over 40 in a workweek. For this exemption, the “regular rate of pay” is calculated by dividing total pay for employment in any workweek by the total number of hours actually worked in that workweek for which such compensation was paid.

Running the Numbers

The “representative period” for determining if enough commissions have been paid may be as short as one month, but must not be greater than one year. The employer must select a representative period in order to determine if “commission-to-compensation ratio” has been met. It is recommended to select a common period, such as 1 month, 1 quarter, 6 months, or 1 year. A representative period of 1 year would be appropriate for businesses with a seasonal sales cycle, where one or two quarters would not accurately capture the nature and proportion of the commissions. The DOL specifically tells us to re-compute the commissions-to-compensation ratio every quarter on a rolling basis when you are using a 1-year representative period. Please see Code of Federal Regulations §779.417 (“The “representative period” for testing employee’s compensation”) and §779.418 (“Grace period for computing portion of compensation representing commissions”).

If the employee is paid entirely by commissions, or draws and commissions, or if commissions are always greater than salary or hourly amounts paid, the-greater-than-50%-commissions condition will have been met. If the employee is not paid in this manner, the employer must separately total the employee’s commissions and other compensation paid during the representative period. The total commissions paid must exceed the total of other compensation paid for this condition to be met.
To determine if an employer has met the “more than one and one-half times the applicable minimum wage” condition, the employer may divide the employee’s total earnings attributed to the pay period by the employee’s total hours worked during such pay period. If the result is greater than time and one-half the minimum wage, this condition of the exemption has been met.
The DOL stresses the importance of the employer maintaining “accurate records of hours worked each workday, hours worked each workweek, and earnings and wages paid.” See DOL Fact Sheet #20, Revised July 2008.


George B. Ward and the attorneys at De Leon & Washburn, P.C. are available to assist clients and out-of-state counsel with all aspects of Texas employment litigation and counseling, including wage and hour assessment and guidance. For more information regarding the firm’s practice areas, please visit our Practice Areas page, and please feel free to contact the attorneys at any time.

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