From the time of its original enactment in 1938, the Fair Labor Standards Act has contained an exemption for certain employees of a “retail or service establishment.” In 1961, the Department of Labor’s Wage and Hour Division (“WHD”) issued interpretive guidance to aid in determining whether an establishment is or is not “retail or service” for purposes of what was then the section 13(a)(2) overtime and minimum wage exemption. Part of the test includes whether the business is in an industry in which a “retail concept” exists. See 29 C.F.R. § 779.316. WHD created two lists, each containing dozens of industries that the agency believed may (29 C.F.R. § 779.320) and may not (29 C.F.R. § 779.317) have a retail concept.
WHD issued that 1961 guidance without opportunity for public comment, and the guidance was effective immediately. After amendments to the “retail” and “not retail” lists in 1970 and 1971, these interpretations have remained unchanged for roughly half a century.
Over the years, these two lists have faced significant skepticism in the courts. WHD did not provide citations for most of the industries listed, and numerous courts have found the classifications illogical, inconsistent, and arbitrary. In addition, the static nature of the lists does not accommodate changes within industries, including shifting marketing and sales strategies, evolving consumer habits, technological innovations, or other factors that could indicate the emergence or decline of a retail concept in a given sector of the economy.
Because of these regulations, businesses in many industries have faced troubling uncertainty in trying to evaluate whether they are, indeed, able to qualify as a “retail or service establishment.” Although the section 13(a)(2) exemption is no longer on the books, the modern version of this exemption exists in section 7(i), which creates an overtime exemption for certain commissioned employees of a retail or service establishment. Businesses on the “retail” list have regarded it as relatively safe to rely on WHD’s guidance in using the 7(i) exemption, but employers on the “not retail” list confront a more difficult set of choices, particularly as courts have increasingly declined to defer to these lists. Moreover, establishments not on either list have faced confusion trying to sort out whether their industry is more like the businesses on one list or the other.
WHD has now acted to correct this situation. On May 18, 2020, WHD announced that it has issued a Final Rule, effective immediately, withdrawing the portions of the interpretive guidance creating the “retail” and “not retail” lists. As a result, 29 C.F.R. §§ 779.317 and .320 will no longer be part of the agency’s interpretations construing the section 7(i) exemption. Instead, WHD will apply the general standards set forth elsewhere in the Part 779 guidance to determine whether a business qualifies as a “retail or service establishment.”
While this action is long overdue, WHD deserves credit for acknowledging its mistake and solving the problem it created so many years ago.