Retail or Service Establishment Commission Overtime Exception

ADMINISTRATIVE POLICY

STATE OF WASHINGTON
DEPARTMENT OF LABOR AND INDUSTRIES
EMPLOYMENT STANDARDS

TITLE: RETAIL OR SERVICE ESTABLISHMENT COMMISSION OVERTIME EXCEPTION
NUMBER: ES.A.10.1
CHAPTER: RCW 49.46.130(3)
REPLACES: N/A
ISSUED: 1/2/2002
REVISED: 7/15/2014

ADMINISTRATIVE POLICY DISCLAIMER

This policy is designed to provide general information in regard to the current opinions of the Department of Labor & Industries on the
subject matter covered. This policy is intended as a guide in the interpretation and application of the relevant statutes, regulations,
and policies, and may not be applicable to all situations. This policy does not replace applicable RCW or WAC standards. If additional
clarification is required, the Program Manager for Employment Standards should be consulted.
This document is effective as of the date of print and supersedes all previous interpretations and guidelines. Changes may occur
after the date of print due to subsequent legislation, administrative rule, or judicial proceedings. The user is encouraged to notify the
Program Manager to provide or receive updated information. This document will remain in effect until rescinded, modified, or
withdrawn by the Director or his or her designee.

The 1997 Legislature amended RCW 49.46.130, the state overtime statute, to provide an
exception to the payment of overtime for hours in excess of 40 in a week to certain
commissioned employees of retail sales or service establishments.

Because RCW 49.46.130 (3) (a) and (b) sets forth language identical to that contained in
the federal Fair Labor Standards Act at 29 USC § 207 (i), and because the purpose of
the legislative amendment was to achieve conformity with federal law governing
exemptions to overtime for certain employees of retail or service establishments, the
Department of Labor and Industries hereby adopts federal Department of Labor
definitions and interpretations of FLSA provisions which are identical to RCW
49.46.130(3)(a) and (b). The federal sources noted in this administrative guideline should
be consulted for additional information regarding interpretation and enforcement.

How to determine who is covered by the retail and service establishment overtime
exception. To determine if an employee is covered by RCW 49.46.130 (3)(a) and (b),
the employer must show:

1. The worker is an employee of a "retail or service establishment;" and
2. The employee's regular rate of pay is in excess one and one-half times the minimum hourly rate required by RCW 49.46.020 for every hour worked in a workweek in which overtime hours are worked; and,
3. More than half of the employee's compensation for a representative period, of not less than one month, represents commissions on goods or services.

Unless all three conditions are met, the exception is not applicable, and overtime premium
pay of at least time and one-half the regular hourly wage must be paid for all hours worked
over 40 in a workweek.

Definition of "retail or service establishment." Retail and service establishments are
defined as establishments where 75 percent of the annual dollar volume of sales of goods
or services (or of both) is not for resale and is recognized as retail sales or services in the
particular industry.

Some examples of establishments which may be retail sales or service are: automobile
repair shops, bowling alleys, gasoline stations, appliance service and repair shops,
department stores and restaurants. Some examples of establishments that are not retail
are: accounting firms, medical and dental clinics, construction companies, radio and
television stations. See ES.A.10.2 for a detailed list of retail and service establishments.

Laundry and similar establishments are excluded from the exemption. The
exemption does not apply to any employee of an establishment which derives more than
25 percent of its annual dollar volume from laundering, cleaning, or repairing clothing or
fabrics, including rug and carpet cleaning, or other non-retail activities.

Employers must select a representative period. The representative period for
determining if enough commissions have been paid may be as short as one month but
must not be greater than one year. An employer must select a representative period or
risk losing eligibility for the exemption. The exemption under RCW 49.46.130(3) requires
the employer to choose a representative period and such period must be designated and
substantiated in the employer's records. Failure to make such a designation may be
grounds for denying application of the exemption.

Note: The absence of such a designation is a violation of the federal record keeping
requirements under 29 CFR 516.16 (b). The USDOL position is that if a retail or service
establishment employer fails to designate the representative period, the exemption from
overtime cannot be claimed. See USDOL Interpretive Bulletin 779.415 and 799.417.

Retail and service establishments must maintain accurate records. State
regulations require retail and service establishment employers to maintain accurate
records of hours worked each workday, hours worked each workweek and earnings and
wages paid. Without hours worked and earnings records, the employer will be unable to
substantiate that all conditions for the exemption have been met. In addition, the
employer must select a representative period of at least one month, but not more than
one year, which typifies the characteristics of the employee's earnings pattern, in order
to test whether the employee is paid principally by commissions. See WAC 296-128-010
to 025 and administrative policy ES.D.1 for record keeping requirements that apply to all
employees except those exempt under RCW 49.46.010(3). These record keeping
requirements apply to employees of retail or service establishments even if those
employees are exempt from overtime under RCW 49.46.130(3)(a) and (b).

Commissions on goods and services must be greater than 50 percent of earnings.
If the employee is paid entirely by commissions, or draws and commissions, or if
commissions are always greater than salary or hourly amounts paid, the "greater than
50 percent commissions" condition will have been met. If the employee is not paid in this
manner, the employer must separately total the employee's commissions and other
compensation paid during the representative period. The total commissions paid must
exceed the total of other compensation paid for this condition to be met.

The regular rate of pay must be more than one and one-half times the minimum
wage. To determine if an employer has met the "more than one and one-half times the
applicable minimum wage" condition, the employer may divide the employee's total
earnings attributed to the pay period by the employee's total hours worked during such
pay period. If the result is greater than one and one-half the statutory minimum wage,
this condition of the exemption has been met.

Steps to "test" the validity of the exception by computing the employee's regular
rate:

1. Determine the representative period;
2. Determine the employee's total commissions for the representative period;
3. Determine the employee's total pay for the representative period from sources other than commissions, e.g., salary, hourly rate, advances, guarantees, draws;
4. Determine whether or not the commissions exceed the total of other forms of pay. If not, the employer is not eligible for this exception, and the employer must pay time and one-half the regular rate for each hour over 40 per week.
5. If commissions do exceed 50 percent, for each pay period in which more than 40 hours were worked in any work week, divide the total compensation for that pay period by the total hours worked during the pay period to confirm that the employee was paid in excess of time and one-half minimum wage for all hours worked (not just overtime hours). If the rate was more than time and one-half minimum wage for all hours worked, the employee need not be paid any more for the overtime hours in that pay period.

If the regular rate does not exceed one and one one-half the minimum wage for all hours
worked, the employee is due time and one-half the regular rate for all hours over 40 per
week.

A week-by-week determination of the regular rate for purposes of the
RCW 49.46.130(3)(a) is not necessary if the earnings are consistently and obviously
higher than required to meet the test. However, situations may be encountered where
the test is not clearly met and specific determinations of the regular rate for particular
weeks are required.

In determining whether or not the employee's regular rate of pay is in excess of one and
one-half times the minimum hourly wage as required by RCW 49.46.130(3)(a), the
employer may divide the employee's total earnings attributed to the pay period by the
employee's total hours worked during such pay period. Total earnings include
commissions, any part of a draw that exceeds commissions, and supplemental payments,
if any, that may have been paid to the employee. Supplemental payments are payments
that have been made in order to increase the employee's earnings to an amount in excess
of one and one-half times the minimum hourly wage.

How to determine a representative period for a group of employees and for new
employees. The same representative period for purposes of RCW 49.46.130(3)(b) may
be used for a group of employees where it can be demonstrated that the factors affecting
the proportionate relationship between total compensation and compensation
representing commissions will be substantially identical for all of the employees in the
group.

If a new employee becomes part of a group, all of whom clearly meet the test of
RCW 49.46.130(3)(b) based on the representative period designated for them, the new
employee may, for enforcement purposes, also be treated as meeting the test of RCW
49.46.130(3)(b) from the start of his employment if it can reasonably be expected that,
considering the experience and other qualifications of the new employee, there will be no
significant difference as to the proportionate relationship between the types of
compensation in his situation from that prevailing for the other members of the group.

Similarly, if a new employee is hired to fill a specific job previously occupied by an
employee for whom substantial information as to compensation is available, and if it can
reasonably be expected that the proportionate compensation for the new employee will
not be substantially different from that of the previous employee, the period applicable to
the previous employee can be applied to the new employee.

In some situations it may not be reasonable to expect that the proportionate
compensation of a new employee will correspond to that of a prior occupant of the
position. This may happen, for example, when an inexperienced employee takes over
for an experienced more highly compensated employee. In such a case, the department
will, for enforcement purposes, permit the employer to determine compliance with RCW
49.46.130(3)(b) on the basis of the new employee's earnings experience (of not less than
one month) until the completion of the full representative period applicable to other
employees in the group.

Certain types of payments can or cannot be considered commissions for purposes
of the exemption.

1. Service charges collected by the establishment and paid to employees. Hotels, motels and restaurants may levy mandatory service charges on customers, which represent a percentage of amounts charged to customers for services. If part or all of the service charges are paid to service employees, that payment may be considered commission and, if other conditions are met, the service employees may be exempt from the payment of overtime premium pay.
2. Tips. Tips paid directly to service employees by customers may never be considered commissions for the purposes of this exemption.
3. Commissions computed as a percentage of charges for services. Some retail or service establishments compute an employee's compensation on the basis of percentage of the charge to the customer, such as the charge for labor or the charge for service and parts used in repair. Compensation computed in this matter "represents commissions on goods or services" for the purpose of applying RCW 49.46.130(3)(a)(b). Employees whose compensation (either in whole or in part) is frequently computed in this fashion are barbers, beauty shop operators, household appliance repairman, and automobile mechanics.

Some auto service garages compensate mechanics or painters on the basis of commission, which are based on a percentage of the estimated labor charges to recondition used cars that are subsequently sold. Such payments "represent commission on goods or services" for the purpose of RCW 49.46.130(3)(a)(b). The term "commissions or services" includes commissions measured by value as well as by sale or service and the value of such service is ultimately reflected in the price of the used cars on which work is performed.

Some auto service garages and car dealerships compensate mechanics and painters on a "flat rate" hour for the work he/she performs. A "flat rate" hour is not an actual clock hour. The painter or mechanic may work only 7, 8 or 9 hours a day and still receive credit for 10, 11, 12 or more "flat rate" hours depending upon how much work he/she has done. Each job is assigned a certain number of hours for which the customer is charged regardless of the actual time it takes to perform the job. The employee is given a certain proportion of that charge expressed in terms of so many dollars and cents per "flat rate" hour rather than in terms of a percentage of the charge to the customer. The dealer does not change the employee's share per flat rate hour if the charge to the customer is changed. Such payments are "commissions on goods or services" for purposes of the exemption. Such employment will qualify for exemption under RCW 49.46.130(3) provided all the other tests of the exemption are met.
4. Commissions paid to department or store managers. In some cases, a department manager or store manager is paid a commission on all or some of the sales made by his department or store. For purposes of applying the exemption to such a manager, these payments are considered to represent commission on goods or services, even though the other employees actually made all or most of the sales. The role, position and function of the manager greatly contribute to the sales of his store or department.