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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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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The Fair Labor Standards Act contains an exemption from overtime for employees of a “retail or service establishment” who earn at least 1.5 the minimum wage for all hours worked and more than 50% of their compensation from commissions. This exemption is often referred to as the “retail sales exemption” or “7(i) exemption,” referencing the section in which it is codified. Often the difficulty in applying the exemption lies with determining which establishments fall within the definition of a “retail or service establishment” and which do not. Department of Labor regulations provide a long list of retail non-retail establishments, but several courts have noted the list does not provide any rationale for distinguishing retail and non-retail and is of limited assistance. See e.g., Martin v. The Refrigeration School, Inc., 968 F.2d 3, 7 n. 2 (9th Cir. 1992). 

Recently, a California District Court was faced with the question of whether account executives responsible for selling precious metals (e.g., gold and platinum) to customers via phone were employed by a “retail or service establishment,” and thus exempt from overtime under the 7(i) exemption.  Parne v. Monex Deposit Co., 2010 U.S. Dist. Lexis 59768.  Relying on the definition of a “retail or service establishment” contained in the 13(a)(2) retail and service exemption [now repealed], the Court explained a retail or service establishment is one that (1) does not earn more than 75% of its revenue from goods or services that are provided for resale; and (2) is recognized as retail in the particular industry. 

In applying this definition, the Court first held that even though customers typically bought metals for investment purposes with the ultimate goal of reselling them for a profit (some customers did not even take possession of the metal), the precious metals were not goods provided for “resale,” as contemplated by the statute, because the metals were not sold with the understanding the metals would be immediately resold. Second, despite competing evidence regarding whether the industry viewed the Defendant as a retail seller (plaintiffs argued the Defendant was similar to a brokerage house), the Court held that summary judgment was still proper because the Defendant satisfied the standard courts have used in determining whether a particular establishment is “recognized as retail”—it sold goods to the general public; it did not take part in the manufacturing process; it provided a product that served the everyday needs of the community; and, it sold goods at the end of the stream of distribution. The factor that presented a “close[] question,” according to the Court, was whether selling precious metals served the “everyday needs of the community”. After noting that cases lack a unified approach in answering this question, the Court held “everyday needs” means “basic” or “integral” needs of members in the community, and collecting and investing metals fell within this standard.

As wage and hour cases continue to be an active area of litigation, the different prerequisites for application of the 7(i) exemption, including which services and goods also meet the “basic” or “integral” needs of the community, will likely continue to be litigated.  Before utilizing the exemptions, employers relying on the 7(i) exemption, should review the relevant regulations and case law to ensure that their business qualifies as a “retail or service establishment”.

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