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New York Court Expands "Retail or Service Establishment" for Commissioned Sales Overtime Exemption

  • October 14, 2005

New York employers providing goods or services not intended for resale may find they are protected against claims for unpaid overtime from "inside sales" employees.  A recent decision from a New York federal court may have loosened the definition of "retail and service establishment" for determining which employees are exempt from the payment of overtime for weekly hours worked over 40. 

The case involved a company providing computer training services to businesses, and not directly to household consumers.  The question for the court was whether the business qualified as a "retail or service establishment" and, if so, whether the worker satisfied the requirements under the Fair Labor Standards Act exemption for commissioned salespeople.  This decision may expand greatly the scope of that overtime pay exemption for employees primarily paid on a commission basis.  [Schwind v. E. W. & Associates, Inc. (SDNY, 2005).]

Requirements of the FLSA Commissioned Sales Exemption

Among the myriad of exemptions from overtime eligibility is the Section 7(i) exemption (codified at Section 207(i) of the FLSA).  For this overtime pay exemption to apply, a three-part test must be satisfied.  First, an individual must earn more in commissions than in non-commission income for a pre-determined representative period of not less than one month.  Non-commission income includes salary, guaranteed draw and other salary-like payments.  Second, there must be proof that, on a workweek-by-workweek basis, the individual receives compensation (commissions, base pay and other compensation) that equals or exceeds time and one-half of the federal minimum wage (currently $5.15) for all hours of work.  Finally, the worker must be employed in a "retail or service establishment."  The Wage-Hour Administrator's regulations have defined narrowly which businesses qualify as "retail or service establishments".  These longstanding regulations were not modified by the Department of Labor's 2004 revision of the regulations covering the white-collar exemptions.

The regulations define a "retail or service" establishment as one in which 75% of annual dollar volume of sales is not for resale, and the establishment is recognized as a retail sales or services company within a particular industry. The regulations further define this establishment as:

one which sells goods or services to the general public.  It 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 the products and skills of such organization and does not take part in the manufacturing process.

The legislative history of Section 7(i) indicates that Congress intended this exemption to extend in some measure beyond consumer goods and services to embrace certain products almost never purchased for family or non-commercial use.  However, the regulations caution that "the list of strictly commercial items for sale that can be deemed retail is very small and a determination as to the application of the retail exemption in specific cases would depend upon the consideration of all the circumstances relevant to the situation."   Prior to Schwind, the phrase "retail or service establishment" has been construed narrowly.

Commission Payments by Software Training and Computer Consulting Business

The plaintiff in the case was a salesperson paid on a commission basis by a software training, computer consulting and employee placement business.  Although he began work as an independent contractor, he eventually became the employer's Vice President of Sales.  In seeking overtime compensation, Schwind sued in federal court seeking overtime premium pay under federal and state wage and hour laws.  The employer disagreed, arguing that he was an exempt salaried worker during the period that he was not an independent contractor. 

The U. S. District Court for the Southern District of New York granted the employer's motion for summary judgment and dismissed the employee's claims because he was exempt as a salaried Vice President.  As to the period of time Schwind was an independent contractor not paid on a salaried basis, the Court agreed to consider the claim for overtime if the employer met the definition of "retail or service establishment" under the FLSA

Contending that the Section 7(i) exemption did not apply, the employee contended that the software was designed for professional sales people and small businesses to keep track of accounts and contracts; it was not appropriate for household consumers.  He further argued that the employer's services were resold by purchasers to their own computer-based training to customers.  In response, the employer asserted that it meets the characteristics of a retail or service establishment because its services met the everyday needs of the community; it was at the end of a distribution system; and, it provides services for the comfort and convenience of the general public.  To support its argument, the company cited analogous situations where the District Court had ruled that computer training schools were retail or service establishments within the meaning of the 7(i) exemption.

Agreeing that the employer was a "retail or service establishment," the court found that the services provided were not intended for resale.  The employer provided trainers to its customers; those trainers, in turn, trained the customers' employees or their own customers, depending upon what was needed.  This placed the employer's services at the end of the stream of distribution, according to the court:  "EWA did not sell a service that was then resold; rather, [it] provided a service to the end customer."  Further, although the employer's customers were businesses rather than household consumers, it still served the needs of the community.  Lastly, the court cited the Congressional intent to extend the 7(i) exemption "in some measure beyond consumer goods and services to embrace certain products almost never purchased for family or non-commercial use."

What the Schwind Decision Means for Employers

Since it may loosen the definition of what constitutes a "retail or service establishment," New York employers should examine their businesses to determine whether the 7(i) exemption is potentially applicable to employees who satisfy the commissions and weekly earnings tests.  If yes, a "look back" period for determining whether a commission-paid employee earns more in commissions than in non-commission income must be established.

Employers also must maintain proof that, on a workweek-by-workweek basis, Section 7(i)-exempt workers receive compensation (e.g., commissions, base pay and other compensation) that equals or exceeds time and one-half of the federal minimum wage for all hours of work.  Be aware that although the New York and other state minimum wage requirements have increased[1], the federal minimum wage remains $5.15 per hour.  Thus, Section 7(i)-exempt workers must receive compensation for all hours worked of at least $7.72 per hour.

Lastly, to take advantage of the 7(i) exemption, employers must maintain records identifying each employee being paid pursuant to Section 7(i); a copy of the agreement or understanding under which Section 7(i) is used; and, the total compensation paid to each Section 7(i) employee in each pay period in accordance with the FLSA recordkeeping regulations, in addition to all FLSA-mandated records.

Jackson Lewis Wage and Hour Practice Group members are available to assist employers with questions on overtime exemptions and other matters.



[1] On January 1, 2005, the New York State minimum wage increased to a rate of $6.00 per hour.  On January 1, 2006 the minimum wage rate will increase to $6.75 per hour, and again on January 1, 2007 to $7.15 per hour.

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