New Overtime Rule Means Fresh Look at Exemptions

What do blacksmiths, ambulance companies, ready-mix concrete suppliers, travel agencies, and truck stop operators have in common? If you said “they’re all barred from taking advantage of an obscure exemption to federal overtime law,” you would be correct. Maybe.

As the Labor Department scrambles to finalize a rule to expand overtimeNew New Passport eligibility to some 5 million workers, employers are starting to take a closer look at some of the exemptions that could shield them from the rising payroll costs likely to come with it. That includes a lesser-known exemption for retail establishments that pay their workers largely in commissions (Section 7(i)), and which is likely to raise some tricky legal questions about just what businesses qualify. The Labor Department’s three-decades-old list of establishments that aren’t retail-ish enough for the exemption has already drawn the ire of at least a few federal judges.

“If you’re an industry on that list and you’re interested in taking advantage of the Section 7(i) overtime exemption, then you ought to be thinking really hard about challenging that regulation,” Jackson Lewis attorney Paul DeCamp told me. DeCamp ran the Labor Department’s Wage and Hour Division in the George W. Bush administration.  

Travel Agencies Want Off ‘Black List.’

Travel agencies are already talking to Congress about how to get themselves off of what they call the “black list” of establishments that the Labor Department declared in 1970 lack a “retail concept.” The designation bars them from claiming the retail/commissions exemption from the Fair Labor Standards Act, which requires employers to pay certain workers time-and-a-half wages for all hours worked beyond 40 each week.   

The stakes related to the exemption are set to become quite a bit higher if the DOL overtime rule goes into effect. A proposed version of the rule would more than double the salary level under which workers are automatically eligible for overtime pay to $50,440 per year from $23,660.

Officials at the American Society of Travel Agents, told me last week that they were under the assumption that many of their member businesses qualified for the exemption until they started looking into DOL’s new proposed rule. That’s when they discovered that the department already blocked travel agencies, along with crop dusters, sheet metal contractors, tree removal firms, and a slew of others from protection as retail establishments.

Murky Legal Territory

ASTA is lobbying Congress on the issue, but businesses looking to get off the black list may have a better shot in court. In 1997, a federal judge in Florida held that a cruise booking company was exempt from overtime requirements after concluding that the DOL’s list appeared to be “arbitrary and without any rational basis explained in the regulations.” That’s similar to what the Ninth Circuit held five years earlier when it said there appeared to be "no generating principles" or "cohesive criteria" supporting the department’s decisions about the types of establishments to include on the list.

Of course, other courts have cited the list in concluding that certain businesses can’t claim the retail and commissions exemption. Still, DeCamp and others told me that employers will likely take a closer look at any and all possible ways to shield themselves from time-and-a-half pay before the new overtime rule takes effect. 

“If there are businesses that are looking at large numbers of employees who will no longer qualify for the white collar exemption, they may be looking for other ways to classify those individuals as overtime exempt,” DeCamp said.

That includes mulling the duties tests used to determine whether a worker who makes more than the threshold amount should still be eligible for overtime. Baseball players and others are already testing the limits of a separate exemption for amusement and recreational businesses. In the meantime, it’s probably safe to assume that the new rule will drum up legal debates about other existing exemptions for seafood, agriculture, computer science and “casual” domestic service workers, among others. 

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