This week, the Wage and Hour Division announced the issuance of two rules interpreting the Fair Labor Standards Act (FLSA) that modernize its application and lessen the burden of overtime calculations for certain employers. First, the agency has eliminated archaic distinctions hindering use of the exception for retail or service establishments under Section 7(i) of the statute. Under Section 7(i), certain employees who receive the majority of their compensation on a commission basis at a rate of 1 and ½ times the federal minimum wage in a representative period do not have to be paid additional overtime compensation if they work more than 40 hours in a particular workweek. Second, the Wage and Hour Division, effective 60 days from publicizing them in the Federal Register, has finalized its regulations for calculating overtime compensation for salaried, nonexempt employees whose base, straight-time compensation encompasses all the hours worked in a workweek and who receive additional compensation such as bonuses, commissions and certain premium payments. The agency has now confirmed that the inclusion of these additional payments will not foreclose an employer from the “half-time” basis of overtime calculation contemplated by the so-called fluctuating workweek proviso delineated in 29 C.F.R. §778.114.

I. The Section 7(i) Rule

Since 1961, Wage and Hour Division regulations have listed establishments that may or may not be recognized as “retail” within the meaning of the FLSA. These lists have been accorded mixed deference in the courts. They have not been modernized or updated since the early 1970s.

Consistent with recent rulemaking (i.e., regular rate and joint employer regulations) that has sought to make the FLSA more consistent with the modern-day workplace, the Wage and Hour Division has rescinded these lists and will now apply one overarching analysis as set forth in 29 C.F.R. §779.318 to determine whether particular establishments should be recognized as retail. Effective immediately, in assessing an establishment’s retail status, the agency will determine whether it “sells goods or services to the general public … and serves the everyday needs of the community in which it is located. The retail or service establishment performs a function in the business organization of the Nation which is at the very end of the stream of distribution, disposing in small quantities of the products and skills of such organization and does not take part in the manufacturing process.” 29 C.F.R. §779.318(a). These principles, objectively applied, should help certain employers, especially those providing services directly to consumers (e.g., travel agencies, tax-consulting services), take advantage of the exception for commission-based employees when historically their operations have been deemed non-retail. In announcing this revised analytical approach in the rule, Cheryl Stanton, administrator of the Wage and Hour Division, stated that the “new rule unshackles job creators in the retail space who had previously been categorically excluded from the exemption without notice and comment.”

The Wage and Hour Division issued this new “retail” approach without notice and comment or a delayed effective date, since the rescinded lists were “interpretive regulations” that originally had been issued without notice and comment or a waiting period.

II. The “Fluctuating Workweek” Rule

Particularly since regulatory commentary was issued by the Obama administration in 2011, there has been significant confusion and controversy about whether the payment of compensation to an employee above and beyond an employee’s salary negates the ability of an employer to calculate overtime under the principles set forth at 29 C.F.R. §778.114. This regulatory proviso provides that when employers and employees have a clear mutual understanding that the employee’s “fixed salary” encompasses as straight-time pay all hours that employee works in a workweek rather than working 40 hours per week or some other fixed weekly work period, such a salary arrangement is permissible as long as the employee receives additional compensation for overtime hours “at a rate not less than one-half” of the employee’s regular rate of pay (and such regular rate is greater than the applicable minimum wage). This method of overtime calculation can provide employers with a significantly reduced overtime burden compared with payment of time and one-half on top of an employee’s salary. The payment of the salary under the rule satisfies the time portion of the FLSA’s time-and-one-half requirement. The issue and concern under the revised regulation are whether the payment of a bonus or premium payment in conjunction with an employee’s salary means that the employee is not receiving a fixed salary within the meaning of the regulation.

The Wage and Hour Division has returned to the historical understanding of the fluctuating workweek portion of the regulation by explicitly stating that employers can pay bonuses, premium payments or other additional pay, such as commissions and hazard pay, to employees paid under the ½ time overtime calculation basis set forth in the regulation. The rule also makes clear that additional payments must be included in the employee’s regular rate of pay unless they are excluded under other parts of the statute.

Secretary of Labor Eugene Scalia said this week that “[t]his final rule offers another example of how the U.S. Department of Labor is working to reduce unnecessary regulatory burdens in order to benefit American workers.” Stanton added that “[a]s employers navigate the challenges of the coronavirus, the rule enhances flexibility to promote hazard pay, and to promote health and safety in the workplace through flexible work schedules that stagger start and end times and implement social distancing in the workplace.”

III. Conclusion

Because of the complexity of the Wage and Hour Division’s rules and rules changes, employers that are contemplating changes to their payroll practices and policies based upon the rules are well advised to consult with counsel before they make changes. As always, state laws that are more pro-employee take precedence and preempt the application of the FLSA. For example, certain states, including California, do not recognize fluctuating workweek overtime calculation principles. In addition, given divergent case law across the country, counsel can provide additional guidance on the deference to and acceptance in the courts that these new rules are likely to receive. Counsel also can be helpful in guiding employers through the calculation of back pay and liquidated damages where employers have misclassified nonexempt employees as exempt – an issue that the Wage and Hour Division specifically does not discuss in its current rulemaking but has previously addressed in an extant opinion letter. See Wage and Hour Division Opinion Letter 2009-3, p. 2 (Jan. 14, 2009) (sanctioning 1/2 time overtime calculations where there was a clear mutual understanding that the fixed salary was designed to compensate the misclassified employee for all hours worked in a particular workweek). BakerHostetler lawyers can assist in the navigation of these wage and hour issues.