I. introduction
The Department of Labor (DOL) has issued a final rule clarifying that employees in retail or service businesses who receive more than half of their compensation in commissions may be exempt from federal overtime pay requirements under Sections 7(i) of the Fair Labor Standards Act (FLSA). The rule creates an opportunity for banks to treat commissioned mortgage loan officers (MLOs) as exempt employees.
Under the final rule, the DOL withdrew a list of industries that could not take advantage of the exemption from overtime pay requirements that is provided to employees who meet the criteria set forth in Section 7(i) of the FLSA. That section provides that employees in a “retail or service establishment” are exempt from overtime pay requirements if they receive more than half of their compensation in commissions and have a regular rate of pay that exceeds 1.5 times the federal minimum wage.
The final rule presents an opportunity for banks to reassess whether commissioned MLO’s and potentially other bank employees should be reclassified as exempt from overtime pay requirements. An argument can be made that bank employees who meet the Section 7(i) requirements now fall within the section's exemption. However, existence of the exemption for bank employees is not crystal clear. As a result, banks should assess their risk tolerance as they consider whether to reclassify eligible MLO’s and other employees as exempt from overtime pay requirements.
II. FLSA section 7(i) - Banks as “retail or service establishment”
Section 7(i) exempts, from overtime pay requirements, an employee of a “retail or service establishment” if two criteria exist: (1) the employee’s regular rate of pay is more than 1.5 times the federal minimum wage; and (2) over a “representative period,” more than half of the employee’s compensation derives from commissions.
While Section 7(i) requires that more than half of an exempt employee’s compensation derives from commissions, neither that section nor the implementing regulations provide a definitive period of time over which the employer should assess whether the compensation threshold is satisfied. Section 7(i) states that “more than half [the employee’s] compensation for a representative period (not less than one month)” must be in commissions for the employee to qualify for the exemption. The implementing regulations provide that the section plainly contemplates a period which can reasonably be accepted by the employer, the employee, and disinterested persons as being truly representative of the compensation aspects of the employee’s employment on which this exemption test depends. The regulations further state that, “as a general rule, if a month is long enough to reflect the necessary factors, the most recent month for which necessary computations can be made… should be chosen.”
With removal of the list of industries that may not take advantage of the overtime pay exemption in order for a business to be a “retail or service establishment,” it must be an “establishment 75 percent 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.”
The implementing regulations provide greater detail regarding the characteristics of a “retail or service establishment.” Based on the characteristics described in the regulations, a strong argument can be made that a bank is a “retail or service establishment” under Section 7(i) and that, consequently, bank employees who satisfy the Section 7(i) requirements are exempt under that section. Clearly, a bank is not a wholesaler or distributor, but instead interacts directly with the end-user of its products and services. In addition, the regulations explain that “[t]ypically a retail or service establishment is one which sells goods or services to the general public. It serves the everyday needs of the community in which it is located.” This language would appear to provide support for the argument that a bank is a retail or service establishment under Section 7(i).
However, the regulations fail to provide an entirely clear picture of which employers may qualify their employees for the Section 7(i) exemption. Under the regulations, an exempt establishment is “generally… ‘big-ticket’ departments and those establishments or parts of establishments whose commission methods of payment traditionally have been used, typically those dealing in furniture, bedding and home furnishings, floor covering, draperies, major appliances, musical instruments, radios and television, men’s clothing, women's ready-to-wear, shoes, corsets, home insulation, and various home custom orders.” In addition, the regulations state that the “transactions of an insurance company are not ordinarily thought of as retail transactions,” suggesting that other financial sector employees who make sales may not qualify for the exemption.