Staffing Firms Gain an Additional FLSA Exemption

For the past two decades, lawsuits under the Fair Labor Standards Act (“FLSA”) have increased more than 200%. One reason for this rise has been the broad construction of the FLSA’s protections that have been imposed by the United States Department of Labor (“DOL”) and the federal courts, creating a challenge for employers to prove that an employee, even one that is highly paid, falls within one of the FLSA’s overtime exemptions.

The United States Supreme Court altered the playing field with its decision in Encino Motorcars, LLC v. Navarro. Prior to that case, DOL and the courts had held that the exemptions under the FLSA must be narrowly construed, making it harder for employers to justify treating employees as exempt from the requirement that employers pay overtime pay. In its ruling, the Court said that a narrow construction of the FLSA’s exemptions was improper; instead, exemptions should be “fairly” interpreted since they are “as much a part of the FLSA’s purpose as the overtime-pay requirement.”

Encino Motorcars

led the DOL to revisit how it has interpreted the FLSA’s overtime exemptions, which has continued with its January 19, 2021 Opinion Letter (FLSA2021-6). This Opinion Letter states that temporary staffing firms may qualify as “retail or service establishments” and therefore are eligible to apply the FLSA’s “retail sales” overtime exemption to some of their employees. This Opinion Letter could provide significant benefits to those staffing companies that use an inside sales force or commissioned recruiters in their business operations.

Retail Sales Exemption

The retail sales exemption, which is contained in 29 U.S.C. § 207(i), provides that an employee is exempt from the overtime (but not minimum wage) requirements of the FLSA if the employee:

1.  works at a “retail or service establishment;”
2. has a regular rate of pay that exceeds one and one-half times the applicable minimum wage; and
3. has earnings in a representative period that is composed of more than fifty percent commissions. Employees who qualify for the retail sales exemption do not need to be paid on a salary basis.

The test for whether a business qualifies as a “retail or service establishment” is:

1. the business must be engaged in the making for selling of goods or services;
2. 75% of the business’s sales for goods or services, or of both, must be recognized as retail in the relevant industry; and
3. no more than 25% of the company’s sales for good or services may be sales for resale.

With regard to the first element, DOL had long limited application of the “retail or service establishment” label only to retail businesses that sell goods or services to consumers. However, several courts held that DOL’s view was wrong and that a business that sells its goods or services to other commercial enterprises could also qualify as “retail or service establishments,” a position that DOL has since adopted.

As to whether a business is “recognized as retail” in the industry, which is the second element, DOL had long taken the view that the business must have a “retail concept,” which means that the business:

• Sells goods or services to the general public;
• Serves the everyday needs of the community;
• Is at the very end of the stream of distribution;
• Disposes its products or skills in small quantities; and
• Does not take part in the manufacturing process

DOL had published a list of industries that it stated did not have a “retail concept” and that list included staffing companies. However, some courts had criticized DOL’s “non-retail” list as “incomplete, arbitrary, and essentially a mindless catalog,” and that it did “not appear to flow from any cohesive criteria.” Based on these criticisms and in light of Encino Motorcars, DOL withdrew the list on May 19, 2020 and, in a Letter Opinion dated August 31, 2020 (FLSA2020-11), it reiterated that a business can be a “retail or service establishment” even if it sells its goods or services to other commercial customers.

Accordingly, in analyzing whether staffing firms qualify as “retail or service establishments,” DOL concluded that staffing companies provide their “services to businesses in the general public, which may serve the employment needs of the community in which the businesses are located.” DOL also concluded that “the placement of a [temporary] worker is the ‘end of the stream of distribution,’” and that staffing companies do not place workers “‘in bulk’” or engage in manufacturing.  Accordingly, DOL concluded that “a typical staffing firm may have a retail concept, and its sales of recruitment and staffing services may be properly recognized as retail by the staffing industry.” DOL also concluded that staffing firms can meet the third requirement of a “retail or services establishment” because staffing firms do not typically “resale” a temporary worker to its customer.

What This Means

DOL’s January 19, 2021 Opinion Letter provides staffing companies with an opportunity to re-evaluate its compensation systems for some of the commissioned positions within the organization. Inside sales and recruiter positions, which typically do not qualify for the “outside sales” or “administrative” exemptions, could qualify for the retail sales exemption. However, it is important to recognize that DOL’s opinion is based on facts provided to it and staffing companies that primarily serve as secondary suppliers may not fall within DOL’s conclusion. They should also be aware that the January 19, 2021 Opinion Letter only applies to the FLSA and that state laws may differ. Finally, even if a position qualifies for the retail sales exemption, the employer must still record the employee’s work time so that it can ensure that the employee’s regular rate of pay exceeds one and one-half times the minimum wage during a given period.