UNPAID OVERTIME: THE RETAIL SERVICE COMMISSION EXCEPTION AND TIPPED EMPLOYEES

The Fair Labor Standards Act (FLSA) requires that all employers covered by the FLSA pay their employees overtime wages for hours worked over 40 hours per workweek. Generally, “overtime” wages are 1.5 times the regular wage. The FLSA, however, identifies several classes of employees who are exempt from the overtime provision. One such class of exempt employee is the “retail service commission” employee.

To qualify as an exempt “retail service commission” employee, three elements must be satisfied: (1) the employer is a retail or service establishment; (2) the employee’s regular rate of pay exceeds 1.5 time the applicable minimum wage; and (3) more than half of the employee’s compensation in a “representative period” must consist of commissions. If the employee does not satisfy all three elements, the employer must pay overtime wages for those hours worked over 40 per workweek.

To satisfy the first element, the employer must be a retail or service establishment. A retail or services establishment is one which sells goods or services to the general public. Under federal regulation, typical retail or services establishments are as follows: “Grocery stores, hardware stores, clothing stores, coal dealers, furniture stores, restaurants, hotels, watch repair establishments, barber shops, and other such local establishments.” 29 C.F.R. § 779.318(a). If the employer falls under any of those categories, the employer will likely qualify as a retail or service establishment.

Next, the employee’s regular rate of pay must exceed 1.5 times the applicable minimum wage. The minimum wage may vary from year to year and from state to state. Furthermore, while federal law establishes a federal minimum wage, states including Florida have established a minimum wage higher than the federal requirement. If the employee’s regular hourly rate is greater than 1.5 times the applicable minimum wage, then the second element of the “retail service commission” exemption is satisfied.

Finally, more than half of the employee’s total compensation must be composed of “commissions” for a “representative period.” A representative period can be anywhere from one month to one year. If the employee is paid entirely by commission, then he or she will satisfy the third element of the exemption. If the employee is paid a salary plus commission, then the commission must make up more than half of the employee’s total compensation to satisfy the third element.

Tips do not count as commission for the purpose of the retail service commission exception. However, it is important to keep in mind that mandatory “tips” are not true tips. Under the FLSA, a mandatory “tip” is considered a service charge and will count as “commission” for the purpose of this exemption. While the FLSA has considered mandatory “tips” to be service charges for some time, effective January 2014, mandatory “tips” are also considered service charges for tax purposes.

Peter T. Mavrick has successfully represented many employers in labor and employment matters. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: peter@mavricklaw.com.