Are You Paying Your Commissioned Employees Overtime When They Don’t Have To? Unlocking the FLSA 7(i) Exemption
You might be overpaying some employees. Many restaurant owners overlook a key opportunity. This is the FLSA 7(i) exemption. It’s a legitimate way to manage your labor costs. This exemption applies to certain commissioned employees. However, the rules are complex. Non-compliance is very costly. Therefore, you must understand all the requirements. This guide will clarify the three strict tests. You can then confidently apply the exemption if you qualify.
What is the FLSA 7(i) Exemption?
The Fair Labor Standards Act (FLSA) mandates overtime pay. This is for non-exempt employees. They must be paid time-and-a-half. This is for all hours over 40 in a workweek.
The FLSA 7(i) exemption offers relief. It is found in Section 7(i) of the FLSA. It allows retail and service establishments to skip overtime. This applies to certain employees paid primarily by commission. In addition, it’s a crucial tool for cost management. Furthermore, it’s particularly relevant to the restaurant industry. Think about managers or catering sales staff. They often earn significant commissions.
The Financial Opportunity: Managing Labor Costs Legally
Labor costs are a huge concern. They are a major factor in the restaurant business. The FLSA 7(i) exemption offers a huge financial break. It removes the requirement for overtime pay. This is only for qualifying commissioned employees.
Consider a catering sales manager. They might work 55 hours in a busy week. Without this exemption, that’s 15 hours of premium pay. Over a year, these premiums add up. They can total thousands of dollars. Therefore, meeting the 7(i) criteria is worthwhile. It directly impacts your bottom line. It provides a legal way to manage expenses. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.
The Three Strict Tests for the FLSA 7(i) Exemption
To qualify, an employee must pass three specific tests. You must meet all three tests simultaneously. Failure on any one test voids the exemption. Consequently, full overtime premium pay must be paid.
1. The Establishment Test: Is Your Restaurant a “Retail or Service Establishment”?
First, your establishment must meet the retail definition. The FLSA defines this carefully. A “retail or service establishment” sells goods or services. These sales must serve the general public. Furthermore, they must not be for resale.
Most restaurants easily meet this test. They sell food and drink directly to consumers. However, there are nuances. A large-scale central kitchen might not qualify. This kitchen might only prepare food for multiple restaurant locations. Similarly, an entity that primarily serves other businesses might not qualify. In addition, an entity must have 75% of its annual dollar volume of sales not for resale. This is crucial for compliance.
2. The Rate Test: Is the Employee’s Regular Rate High Enough?
Next, the employee’s regular rate must be considered. Their total earnings must be sufficient. They must equal more than one and a half times the minimum wage. This must be true for every hour worked.
For example, assume the federal minimum wage is $7.25/hour. The required minimum rate is $10.88 per hour ($7.25 x 1.5). This calculation must be done weekly. You must include all wages and commissions. Therefore, you divide total pay by total hours worked. The result must exceed the minimum threshold.
3. The Commission Test: Are Commissions Truly Primary Pay?
Finally, the employee must receive a commission. More than half of their total compensation must come from commissions. This is calculated over a representative period. The period must be at least one month.
- What Counts as “Commission”? The Department of Labor (DOL) defines commissions. They must be payments for goods or services. A percentage of the sales or profit must also be determined for them. Commissions must be genuinely tied to sales performance.
- What Does NOT Count? Fixed salaries or bonuses not tied to sales volume do not count. Base hourly wages for non-sales tasks also don’t count.
This is often the most challenging test. You must track and document all compensation components. You need solid records to prove this threshold.
The Cost of Non-Compliance (The Fear)
Compliance errors are costly. They expose your business to significant risks. These include back-pay liabilities. They also include stiff penalties and legal fees.
If you fail any of the three tests, the exemption is void. You immediately owe full overtime premium pay. This applies retroactively to all hours worked. Furthermore, the statute of limitations is often two years. It can be extended to three years for willful violations. Imagine an audit finding four years of unpaid overtime. This could cripple a small restaurant business. Therefore, you must be meticulous in documentation.
The Assurance (The Benefit): Confident Cost Management
Employers who meet all three tests can proceed confidently. They can apply the FLSA 7(i) exemption legitimately. You don’t have to pay overtime for these specific employees. This is a significant competitive advantage. It translates directly into payroll savings. Furthermore, it simplifies your payroll process for these employees.
The key is rigorous, provable compliance. You must maintain excellent payroll records. These records must clearly show compliance with the rate and commission tests.
Actionable Advice for Restaurant Owners
- Audit Your Roles: Identify any commissioned employees. This often includes catering directors or event planners.
- Verify the Commission Test: Run a historical analysis. Does more than 50% of their pay come from commissions? Do this every month.
- Check the Rate Test: Calculate the regular rate weekly. Ensure it meets the 1.5x minimum wage requirement.
- Document Everything: Keep detailed records of sales volume. Also, maintain commission payout percentages. Maintain records of all hours worked and total compensation.
For more on managing complex payroll rules, see our guide on calculating the tip credit.
Don’t Leave Money on the Table or Risk an Audit
Are you leaving legitimate savings unclaimed? Or are you risking a major audit? Compliance should never be a guess. Shaky adherence to the FLSA 7(i) exemption is a recipe for disaster. You need a rock-solid defense.
Our platform specializes in restaurant payroll and HR. We ensure accurate and compliant application of complex FLSA rules. This includes the FLSA 7(i) exemption. We help you maximize legitimate cost savings. Furthermore, we solidify your defense against potential DOL audits.
Learn more by requesting a demo today. Let us help you navigate the complexities of commissioned employee payroll. Make sure every dollar spent on labor is compliant and efficient.