Exemption from Overtime for Retail or Service Industries

In these dire economic times, employers are looking for more creative and incentive-based pay plans. Not well-known but well-established is an exemption from overtime for commissioned employees in the retail industry. Under Section 7(i) of the Fair Labor Standards Act (FLSA), any employee of a retail or service establishment may be exempt from overtime if the employee receives a majority of compensation from “commissions” over a representative period and receives a “regular rate” of pay in excess of one and one-half times the applicable minimum wage for all hours in any overtime week.

Similarly, Section 6(b) of the Colorado Minimum Wage Order provides an exemption from overtime for sales employees of retail or service industries paid on a commission basis, provided that more than 50 percent of their total earnings in a pay period are derived from commissioned sales and their regular rate of pay is at least one and one-half times the minimum wage.
The Colorado Department of Labor & Employment, Division of Labor (CDLE) has said the commissioned sales exemption is not limited to those workers typically considered to be “salespeople” paid on commissions. The exemption may also apply to other employees who are paid on a commission basis (and who meet all other conditions of the commissioned sales exemption).
Significantly, CDLE’s position means employees earning commissions who are not actually engaged in sales may fall under this exemption. Further, a compensation plan based on flat-rate hours as defined by the U.S. Department of Labor may be classified as “commissions” for the purpose of the Section 6(b) commission sales exemption test. Flat rate means each job is assigned a certain number of hours for which the customer is charged regardless of the actual time it takes to perform the job.
For instance, a detailer in a retail or service establishment like an auto dealership who is paid on a flat-rate basis may be eligible for exemption from overtime under both federal and state law. To show that the detailer’s pay plan is commissioned, the dealership must be able to show that the employee is paid a portion or percentage of the labor charges that are added to the cost of the vehicle and ultimately passed on to and paid by the customer.
Another caution is that in a slow week, an employee may not have earned enough flat-rate hours to cover the required one and one-half times minimum wage for each clock hour he worked. In such cases, the employee is not exempt from overtime for that week. Because the higher of the state or federal minimum wage applies, employees exempt from overtime under FLSA 7(i) or Colorado 6(b) tests must receive more than $11.04 an hour for each clock hour worked in a week, based on Colorado’s $7.36 minimum wage currently in effect.