Wage and Hour Law Update : Wage & Hour Lawyer & Attorney : Jackson Lewis Law Firm : Minimum Wage, Overtime & Service Contracts

The “retail or service exemption” to the FLSA, sometimes referred to as the “7(i) exemption”, noting the location where it is codified, 29 U.S.C. Section 207(i), has three requirements. While the first requirement, to pay time and one-half the minimum wage for all hours of work, is straightforward, the other two prongs—that an employee receive 50% of his or her income in the form of “bona fide commissions” and that the individual be employed by a “retail or service establishment”—sometimes lead to litigation. Recently, a district court in Vermont addressed these two prongs as applied to a cable installer. 

In Owopetu v. Nationwide CATV Auditing Servs., Inc., 2011 U.S. Dist. LEXIS 24948 (D. Vt. Mar. 11, 2011), the court held that a cable installer working for a subcontractor of the cable provider who was paid a percentage of the amount billed to the provider by the subconstractor received bona fide commissions. The court held a bona fide commission existed because his “ability to earn income fluctuated based upon the volume of customer work orders, he was paid a percentage of the value of each service performed, and he was provided performance-based incentives to increase his income.”   The court relied on several cases that have held a compensation system that creates an incentive to work faster and more efficiently is consistent with the existence of a bona fide commission. It was immaterial that the individual was not engaged in sales.

Nevertheless, the court denied summary judgment because the defendant had not produced evidence regarding whether the plaintiff was employed by a “retail or service” establishment. While the company established that it provided services that are not for resale (installation of cable at customer’s homes), which is one requirement need to satisfy the definition of a “retail or service establishment”, no evidence was presented regarding whether the services are “recognized as retail in the industry,” the other requirement.   The Defendant will have to establish that evidence at trial or seek permission to move for summary judgment on a fuller record.

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The 7(i) exemption from overtime is not limited to “local” retail or service establishments, and applies to employers who sell nationwide via phone or the internet, a Utah district court has held, rejecting DOL regulations, and finding them antiquated. See Selz v. Invest Tools, Inc., 2011 U.S. Dist. LEXIS 93604 (D. Utah, Jan. 27, 2011). 

Plaintiffs were employed as sales representatives at a call center and were responsible for selling, via phone, products and services to educate individual investors on how to personally invest in exchange markets on-line. In response to a suit for alleged unpaid overtime initiated by sales representatives, the employer moved for summary judgment based on the 7(i) exemption, which applies to employees who earn than 1.5 times the minimum wage, make over 50% of their income in commissions and are employed in a “retail or service establishment.” The court rejected plaintiff’s argument that the exemption could not apply because defendant sold their products nationally, not locally, finding the persuasive value of the DOL’s regulations defining a retail or service establishment to be “minimal,” noting they were drafted for the repealed 13(a)(2) exemption formerly applicable to all retail and service employees. The court further noted the regulations have not been updated to reflect the impact of the Internet. “The internet has fundamentally changed what is considered a retail or service establishment and insofar as the Department of Labor regulations do not take this into account, they are not a persuasive interpretation of the FLSA,” the court held.

In evaluating whether the call center was a “retail or service establishment,” the court examined whether the establishment sold goods to the general public, served the everyday needs of the community, was at the end of stream of distribution, and whether it took part in the manufacturing process, all of which the court held were satisfied. Further, the court held even though the employer did not have a physical location accessible by the public, it was accessible via phone and internet and thus, had an establishment available to the public that met its everyday needs. 

While the court granted summary judgment to the employer regarding its status as a “retail or service establishment,” the court denied summary judgment as the applicability of the exemption, finding a fact issue whether the employees earn 1.5 times minimum wage for each hour worked, one of the other requirements needed to establish the exemption.

The case reflects a growing trend of district courts recognizing that Department of Labor regulations defining a “retail or service establishment” are antiquated and are of limited use in interpreting the 7(i) exemption, given the changes in how business is now conducted, particularly through phone sales and the internet. Employees who sell via phone or internet should evaluate the applicability of the 7(i) exemption in light of this decision. Of course, state law also must be consulted.

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A Pennsylvania company that sells Sprint cellular phones, service plans, and cell-phone accessories is a “retail or service establishment” under the 7(i) exemption, a Pennsylvania district court holds, granting partial summary judgment to the employer.  Haskins v. VIP Wireless LLC 300, 2010 U.S. Dist. LEXIS 106205 (W.D. Pa. Oct. 5, 2010).  A sales representative employed by VIP Wireless alleged that he and over 100 other sales representatives were misclassified as exempt because they did not meet the requirements of the administrative exemption (due to a failure to exercise independent discretion and judgment) or the executive exemption (since they did not supervise two or more people).  But he and his counsel failed to consider the applicability of the “7(i)” exemption. 

Unlike many FLSA exemptions, the 7(i) exemption does not depend on the duties of the employee, but rather on his or her compensation and the business of the employer.  The exemption applies to employees of a “retail or service establishment” who earn at least 50% of their compensation from commissions and at least one and one-half times the minimum wage for all hours worked. Often, as here, the issue in cases applying the exemption is whether the particular establishment meets the definition of a “retail or service establishment.”   

Citing Department of Labor regulations, the Court held a retail or service establishment is one that typically sells goods and services to the general public (as compared to the wholesale market); sells goods or services that meet the everyday needs of the community; provides for the “comfort and convenience of the public” in the course of its daily living; and sells goods and services at the end of the distribution stream. The Court had little difficultly in concluding the cell-phone stores met this standard—noting that in this day and age, cell phones certainly meet an “everyday need”, they are sold to the general public, and they are not purchased by consumers or businesses with the intent of reselling them. 

Relying on a DOL list of entities lacking a retail concept contained in the FLSA regulations, the Plaintiff argued the cell-phone retailer was not a “retail or service establishment” but rather a “telephone company”, an entity specifically identified by the DOL as lacking a retail concept. The Court rejected this argument. “VIP Wireless was a type of ‘exclusive distributor,’ ‘authorized agent’ or other form of contractor whose function was to solicit customers for Sprint and Nextel cell phones and service plans and to provide a retail outlet for those products. . . . VIP Wireless was an outlet for Sprint/Nextel, a telecommunications or telephone company, but it was not itself such a company,” the Court held. It cited, among other things, the “Preferred Retailer” agreement VIP Wireless entered into with Sprint as support.

Although the Court’s decision only resolved whether one prong necessary to establish the exemption had been met, the employer argued that given the individualized inquiry necessary to assess the other two prongs (50% commissions and 1.5 times the minimum wage), the collective action allegations should be dismissed.  The Court found, however, that it was too soon to determine whether individual inquires would predominate, and a determination whether the case could proceed collectively would have to await further discovery and would be resolved when the plaintiff made a motion for conditional certification.      Employers in the retail and service industries with commissioned employees should carefully analyze the potential applicability of the 7(i) exemption.

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Litigation regarding what constitutes a “retail or service establishment,” under the “7(i)” or “retail sales” exemption continues. We recently reported a district court decision applying the exemption to employees selling precious metals. See La Parne v. Monex Deposit Co., 2010 U.S. Dist. LEXIS 59768 (C.D. Cal. Apr. 29, 2010).  Just a couple of months later, another district court analyzed the applicability of the exemption, this time to a company that provides window washing services primarily to commercial high rise buildings that are paid for by a management company, not the individual tenants. Alvarado v. Corporate Cleaning Service, Inc., 2010 U.S. Dist. Lexis 62378 (N.D. Ill. June 21, 2010).

The Court explained that to fall within the definition of a retail or service establishment, two requirements must be met: (1) the establishment cannot earn more than 75% of its revenue from goods or services that are provided for resale; and (2) it must be recognized as retail in the particular industry. Plaintiffs argued the window washing services were resold (and not retail) because the defendant did not contract directly with the commercial or residential tenants to provide the service, but instead, with management companies, who then recovered the cost of such work either through rent, property management fees, or assessments. Therefore, the services were bought by the management company and then resold to the tenants.  The Court rejected this assertion, and held the building management companies were “merely conduits,” or agents facilitating the purchase of window washing services, not middlemen reselling window washing services. 

The Court also found the services were “recognized as retail in the industry” because they were sold to the general public (even though most of their customers were commercial clients, not residential clients, rejecting plaintiffs’ argument that the exemption only applies to residential sales); the services met the “everyday needs of the community”; the services were provided at the end of the stream of distribution; and the defendant did not engage in manufacturing. The Court also held the mere fact the services were sold to corporate accounts with multiple buildings (as opposed to individual owners or those with a single building), did not transform the sale to a “wholesale” transaction. The Court also rejected plaintiffs’ argument that providing proposals to customers estimating the cost of the services were not “retail” transactions, finding such proposals are not akin to competitive bidding (which Department of Labor regulations state are not recognized as retail).

Nevertheless, despite holding plaintiffs were employed by a “retail or service establishment,” the Court denied summary judgment to the employer finding a question of fact existed whether plaintiffs satisfied another requirement necessary to establish the exemption—being paid more than 50% in commissions. Plaintiffs were paid using a point system, whereby they were compensated based on the number of jobs completed. Each job was assigned a number of points based on the number of windows washed. Thus, the quicker and more efficiently the plaintiffs worked, the more they earned per hour.  The Court held a commission exists when there is some relationship or correlation between compensation paid to the employees and the amount charged to the customers. The court found questions of fact remained regarding whether a true nexus existed between pay received and the amount charged to the customer based on evidence produced by the plaintiffs that on occasion, the labor cost charged to a customer did not fluctuate based on the number of points.   

Employers relying on the 7(i) exemption under federal law should review the relevant regulations and cases to ensure that the business qualifies as a “retail or service establishment” and that the compensation it provides is a “commission” as defined in the case law.

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