The Unseen Threat: Why Your Sales Instructors and Central Office Staff Can’t Use the 7(i) Exemption
Are you confused about who qualifies for the FLSA 7(i) exemption? Many employers assume all commissioned sales staff are exempt. This is a common and costly mistake. The FLSA 7(i) exemption is actually quite narrow. Specifically, your sales instructors and central office staff are likely not covered. Understanding this distinction is vital. Misclassification can lead to expensive wage and hour audits. Furthermore, back wage liabilities can quickly accumulate.
Why Is the FLSA 7(i) Exemption So Misunderstood?
The Fair Labor Standards Act (FLSA) sets minimum wage and overtime pay standards. Section 7(i) provides a limited overtime exemption. It is often referred to as the “commissioned employee exemption.” This rule allows retail or service establishments to avoid paying overtime. Certain conditions must be met for this to apply. Specifically, two main requirements exist. Both must be satisfied for the FLSA 7(i) exemption to be valid.
Requirement 1: The “Employed By” Rule
First, the employee must be “employed by a retail or service establishment.” This is the foundational test. This means the individual must work for a business recognized as retail or service. Think of typical brick-and-mortar stores. This is the first hurdle.
The FLSA defines a “retail or service establishment” clearly. It is an establishment 75% of whose annual dollar volume of sales or services is not for resale. Furthermore, it must be recognized as retail or service in the industry. For restaurant owners, your individual locations generally meet this standard.
However, where the employee is actually employed becomes the critical factor. It’s not just about where the work takes place.
Requirement 2: The Compensation Test
Second, the employee’s regular rate of pay must exceed one and one-half times the minimum wage. Also, more than half of the employee’s total compensation for a representative period must represent commissions on goods or services. This is the compensation test.
Meeting the compensation test alone is not enough. Many sales roles might satisfy this pay structure. Therefore, the “employed by a retail or service establishment” test must also be met. This is where most central office and instructor roles fail.
The Central Office Exclusion: A Fatal Flaw
This is the “unseen threat” in misclassification. The exemption is tied to the establishment, not the job function. An establishment is a distinct physical place of business. It is where you perform your duties.
Central Office Staff
Consider your central office staff. These individuals work in your corporate headquarters. They might handle payroll, HR, or finance. A retail establishment does not employ them. A central administrative or business office employs them. Consequently, they are generally excluded from the FLSA 7(i) exemption.
This is true even if they support your retail locations. Even if their work directly impacts sales, the exemption doesn’t apply. Their place of employment disqualifies them.
The Fact Sheet Example
The Department of Labor (DOL) provides clear guidance. Their fact sheets confirm this exclusion. A key example illustrates this perfectly:
- Example: A company has 20 individual retail stores. They employ an employee in their central office (or headquarters). This employee visits the 20 stores to train and supervise.
- Verdict: This employee is not exempt under the FLSA 7(i) exemption.
The employment is with the central office. The central office is not a retail or service establishment. Therefore, the exemption cannot apply. Furthermore, the employee must be treated as non-exempt. Overtime must be paid for hours worked over 40 in a workweek.
Sales Instructors and Trainers
Now, let’s specifically address sales instructors or trainers. They often travel between locations. They might even earn a commission based on their trainees’ performance. They are likely hired and paid through the corporate central office.
In addition, their primary function is often training, not direct retail sales. The legal test focuses on the establishment they are employed by. Since they are generally tied to the central administrative office, the FLSA 7(i) exemption does not apply. Ultimately, their role is administrative, even if commission-based.
Actionable Steps for Compliance and Risk Mitigation
Misclassifying even a handful of employees is risky. An audit can look back several years. Penalties and back wages can be financially devastating. Therefore, proactive compliance is essential.
1. Review Your Organizational Structure
First, clearly identify your separate establishments. Understand which employees are tied to a retail location. Then, determine which employees are tied to the central administrative office. Be honest in this assessment. Do not simply call an office a “store” to fit the rule.
2. Audit All Commissioned Roles
Next, review every role you currently classify as exempt under Section 7(i). Ensure both the “employed by” rule and the compensation test are met. Be particularly careful with managerial roles that receive commissions.
- Self-Correction: If you find misclassified employees, correct their status immediately. Begin paying them overtime now. You may need to address past liabilities.
3. Focus on Accurate Job Descriptions
Furthermore, ensure job descriptions accurately reflect duties. Clearly define the employee’s place of employment. This documentation is vital in an audit.
4. Consult with an Expert
Wage and hour laws are complex. The stakes are incredibly high. The best defense is expert knowledge. However, even experienced HR teams sometimes make mistakes. Consider seeking external counsel.
Your Next Step: Don’t Wait for an Audit
Misclassification happens at the corporate level. It’s often due to an oversight in organizational structure. This lack of compliance threatens your bottom line. Ensure your entire workforce structure is compliant before an audit. The FLSA 7(i) exemption is a complex area. Don’t leave compliance to guesswork.
We understand the pressures faced by employers and HR professionals. Our team specializes in FLSA compliance for the service industry. We can help you navigate this complex landscape.
Don’t risk costly fines and penalties. Let us review your structure for FLSA compliance today. Request a demo of our specialized payroll and HR solutions now. Protect your business from the unseen threat of wage and hour violations.