We are aware that the Department of Labor (DOL) issued a final rule that appears to allow mortgage loan officers (MLOs) at banks to be classified as exempt from overtime pay if more than 50% of their earnings come from commissions. We have an MLO whose earnings are based on commission, but the MLO also receives a monthly forgivable draw that acts as a floor on their compensation. When the MLO’s monthly earnings exceed the draw, they receive the draw plus the difference, and when the monthly earnings do not exceed the draw, the MLO receives only the draw. More than 80% of the MLO’s total wages are commission-based. Can an MLO with this income structure be classified as exempt?

An MLO with this income structure may qualify as an exempt employee under the Fair Labor Standards Act (FLSA) if more than half of their compensation is from commissions for a representative period. However, your bank must have a “retail concept” and meet other criteria to claim this exemption.

The FLSA generally provides that employers must pay overtime to employees who work more than forty hours in a workweek. However, employers are not required to pay overtime to “any employee of a retail or service establishment” if their regular rate of pay exceeds one and one-half times the minimum wage and “more than half [their] compensation for a representative period (not less than one month) represents commissions on goods or services.” Since this MLO received more than 80% of their compensation from commissions, it is likely that your bank would be able to show that more than half of the MLO’s compensation represented commissions within a certain time period.

Until recently, the DOL’s FLSA regulations included a “partial list of establishments” that classified banks as businesses having “no retail concept” and unable to qualify as a retail or service establishment eligible to claim the overtime exemption. On May 8, 2020, the DOL adopted a final rule withdrawing the “partial list of establishments” and allowing businesses previously appearing on the list to claim the exemption if they have a “retail concept” and meet the other criteria for a “retail or service establishment” set forth in the FLSA regulations.

As noted in the final rule, a business with a retail concept “typically ‘sells goods or services to the general public,’ ‘serves the everyday needs of the community,’ ‘is at the very end of the stream of distribution,’ disposes its products and skills ‘in small quantities,’ and ‘does not take part in the manufacturing process.’”

A footnote in the final rule indicates that several other sections of the FLSA regulations discuss the term “retail concept” and the additional criteria to qualify as a retail or service establishment. These additional criteria include the requirements that 75% of the retail or service establishment’s “annual dollar volume must be derived from the sales of goods or services (or of both) which are recognized as retail sales or services in the particular industry” and 75% of the retail or service establishment’s “annual dollar volume must be from sales of goods or of services (or of both) which are not made for resale.” We recommend consulting with your bank counsel to determine if your bank has a retail concept and meets the additional criteria to qualify as a retail or service establishment.

For resources related to our guidance, please see:

Fair Labor Standards Act, 29 USC 207(a)(i) (“Except as otherwise provided in this section, no employer shall employ any of his employees who in any workweek is engaged in commerce or in the production of goods for commerce, or is employed in an enterprise engaged in commerce or in the production of goods for commerce, for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.”)

Fair Labor Standards Act, 29 USC 207(i) (“No employer shall be deemed to have violated subsection (a) by employing any employee of a retail or service establishment for a workweek in excess of the applicable workweek specified therein, if (1) the regular rate of pay of such employee is in excess of one and one-half times the minimum hourly rate applicable to him under section 206 of this title, and (2) more than half his compensation for a representative period (not less than one month) represents commissions on goods or services. In determining the proportion of compensation representing commissions, all earnings resulting from the application of a bona fide commission rate shall be deemed commissions on goods or services without regard to whether the computed commissions exceed the draw or guarantee.

Final Rule, Partial Lists of Establishments that Lack or May Have a “Retail Concept” Under the Fair Labor Standards Act, 85 Fed. Reg. 29867, 29867 (May 19, 2020) (“In this final rule, the Department of Labor (Department) withdraws the ‘partial list of establishments’ that it previously viewed as having ‘no retail concept’ and categorically unable to qualify as retail or service establishments eligible to claim the section 7(i) exemption; and the ‘partial list of establishments’ that, in its view, ‘may be recognized as retail’ for purposes of the exemption.”)

FLSA Regulations, 29 CFR 779.317 [withdrawn as of May 19, 2020] (“There are types of establishments in industries where it is not readily apparent whether a retail concept exists and whether or not the exemption can apply. It, therefore, is not possible to give a complete list of the types of establishments that have no retail concept. It is possible, however, to give a partial list of establishments to which the retail concept does not apply. This list is as follows: . . . Banks (both commercial and savings).”)

Final Rule, Partial Lists of Establishments that Lack or May Have a “Retail Concept” Under the Fair Labor Standards Act, 85 Fed. Reg. 29867, 29868 (May 19, 2020) (“The Department hereby withdraws the regulatory provision found at 29 CFR 779.317, which lists specific types of establishments that, in the Department's view, lacked a retail concept and were therefore ineligible to claim the section 7(i) exemption. Establishments which had been listed as lacking a retail concept may now assert under part 779 that they have a retail concept and may be able to qualify as retail or service establishments. The Department will now apply its interpretations set forth in § 779.318 and elsewhere in part 779 to determine whether establishments previously listed in § 779.317 have a retail concept and satisfy the additional criteria necessary to qualify as retail or service establishments.”)

Final Rule, Partial Lists of Establishments that Lack or May Have a “Retail Concept” Under the Fair Labor Standards Act, 85 Fed. Reg. 29867, 29868 (May 19, 2020) (“The Department has interpreted ‘retail or service establishment’ as requiring the establishment to have a ‘retail concept.’ 29 CFR 779.316. Such an establishment typically ‘sells goods or services to the general public,’ ‘serves the everyday needs of the community,’ ‘is at the very end of the stream of distribution,’ disposes its products and skills ‘in small quantities,’ and ‘does not take part in the manufacturing process.’ Id. at § 779.318(a).”)

Final Rule, Partial Lists of Establishments that Lack or May Have a “Retail Concept” Under the Fair Labor Standards Act, 85 Fed. Reg. 29867, footnote 3 (May 19, 2020) (“See, e.g., 29 CFR 779.316, 319, 321 (further discussing retail concept) & 779.322-336 (discussing additional criteria to qualify as a retail or service establishment).”)

FLSA Regulations, 29 CFR 779.316 (“Establishments outside ‘retail concept’ not within statutory definition; lack first requirement. It is plain, therefore, that the term ‘retail or service establishment’ as used in the Act does not encompass establishments in industries lacking a ‘retail concept’. Such establishments not having been traditionally regarded as retail or service establishments cannot under any circumstances qualify as a ‘retail or service establishment’ within the statutory definition of the Act, since they fail to meet the first requirement of the statutory definition.”)

FLSA Regulations, 29 CFR 779.318(a) (“Characteristics and examples of retail or service establishments. (a) Typically a retail or service establishment is one which sells goods or services to the general public. It serves the everyday needs of the community in which it is located. The retail or service establishment performs a function in the business organization of the Nation which is at the very end of the stream of distribution, disposing in small quantities of the products and skills of such organization and does not take part in the manufacturing process.”)

FLSA Regulations, 29 CFR 779.319 (A retail or service establishment must be open to general public. The location of the retail or service establishment, whether in an industrial plant, an office building, a railroad depot, or a government park, etc., will make no difference in the application of the exemption and such an establishment will be exempt if it meets the tests of the exemption. Generally, however, an establishment, wherever located, will not be considered a retail or service establishment within the meaning of the Act, if it is not ordinarily available to the general consuming public.”)

FLSA Regulations, 29 CFR 779.321(a) (“Inapplicability of ‘retail concept’ to some types of sales or services of an eligible establishment. Only those sales or services to which the retail concept applies may be recognized as retail sales of goods or services for purposes of the exemption. The fact that the particular establishment may have a concept of retailability, in that it makes sales of types which may be recognized as retail, is not determinative unless the requisite portion of its annual dollar volume is derived from particular sales of its goods and services which have a concept of retailability.”)

FLSA Regulations, 29 CFR 779.322 (“Second requirement for qualifying as a ‘retail or service establishment.’ If the business is one to which the retail concept is applicable then the second requirement for qualifying as a ‘retail or service establishment’ within that term's statutory definition is that 75 percent of the establishment's annual dollar volume must be derived from sales of goods or services (or of both) which are recognized as retail sales or services in the particular industry. Under the Act, this requirement is distinct from the requirement that 75 percent of annual dollar volume be from sales of goods or services ‘not for resale’ (§ 779.329); many sales which are not for resale lack a retail concept and the fact that a sale is not for resale cannot establish that it is recognized as retail in a particular industry. . . . To determine whether the sales or services of an establishment are recognized as retail sales or services in the particular industry, we must inquire into what is meant by the terms ‘recognized’ and ‘in the particular industry,’ and into the functions of the Secretary and the courts in determining whether the sales are recognized as retail in the industry.”)

FLSA Regulations, 29 CFR 779.330 (“Third requirement for qualifying as a ‘retail or service establishment.’ The third requirement for qualifying as a ‘retail or service establishment’ within that term's statutory definition is that 75 percent of the retail or service establishment's annual dollar volume must be from sales of goods or of services (or of both) which are not made for resale. At least three-fourths of the total sales of goods or services (or of both) (measured by annual dollar volume) must not be made for resale. Except under the special provision in section 3(n) of the Act, discussed in §779.335, the requirement that 75 percent of the establishment's dollar volume be from sales of goods or services ‘not for resale’ is a separate test and a sale which ‘for resale’ cannot be counted toward the required 75 percent even if it is recognized as retail in the particular industry. The prescribed 75 percent must be from sales which are both not for resale and recognized as retail.”