On January 19, 2021, the U.S. Department of Labor issued an opinion letter regarding the Fair Labor Standards Act’s (“FLSA”) “retail or service establishment” exemption and whether it applies to staffing firms that recruit, hire, and place employees on temporary assignments. Notably, the FLSA exempts certain employees of “retail or service establishments” from the overtime pay requirements. The exemption applies to any employee (1) who works at a retail or service establishment; (2) whose regular rate of pay exceeds one and one-half times the applicable minimum wage; and (3) whose earnings in a representative period are composed of more than fifty percent commissions.
In order to qualify as a “retail or service establishment” under the first element of the test, the business must be “engaged in the making of sales of goods or services, 75 percent of its sales of goods or services, or of both, must be recognized as retail in the particular industry, and not over 25 percent of its sales of goods or services, or of both, may be sales for resale.” The DOL concluded that, under the facts set forth in the opinion letter, a staffing firm would qualify as a “retail or service establishment,” opening the doors for a staffing firm’s employees to be exempt from the FLSA’s overtime requirements.
The DOL found that a staffing firm qualifies as a “retail or service establishment” because staffing firms provide services, in the form of temporary staffing and permanent recruitment services, to commercial entities. Moreover, the DOL determined that when a staffing firm provides recruitment services, the “end of the stream of distribution” is placement of a worker with a business, analogizing this service to providers of window-washing services, commercial pest elimination services, and commercial computer training services, and finding that the staffing firm satisfies the requirement that 75 percent of its sales of services be recognized as retail in the particular industry. Finally, the DOL stated that a staffing firm may not resell its services to satisfy the final prong – “not over 25 percent of its sales of goods or services, or of both, may be sales for resale.” The DOL considers a staffing firm to resell its services when a staffing firm pays a fee to a second staffing firm or outside recruiter for procuring a worker whom the first firm places with a customer, so long as the staffing firm does not engage in such an action for more than 25 percent of its placements then a staffing firm may be considered a “retail or services establishment.”
Although the DOL has taken the position that staffing firms may qualify as a “retail or service establishment,” it is important to note that the employer must also meet the other two elements of the test—the employee has a regular rate of pay at least one and one-half times the minimum wage and more than half of the employee’s earnings in a representative period consist of commissions.
These opinion letters are issued based exclusively on the specific facts presented to the DOL by the requester. However, these opinion letters may provide guidance to employers, and, therefore, employers should review their policies and pay practices in light of this new guidance to ensure compliance with the FLSA. State wage and hour laws may also apply, depending on the jurisdiction in which the work is performed. If you have any questions regarding the issues raised in this client alert, please contact your Labor and Employment counsel at Smith, Gambrell & Russell, LLP.