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FLSA Retail Exemption Applies to Finance Managers

Volume 4, Issue 8
July 22, 2005

The Ninth Circuit Court of Appeals has concluded that finance and insurance managers employed by automobile dealerships can be covered by the "retail exemption" to overtime obligations under the Fair Labor Standards Act ("FLSA"). The Court's decision in this regard reverses three decisions of Oregon and Washington district courts.

The FLSA's retail exemption from overtime payments applies to: 1) any employee of a retail or service establishment; 2) whose regular rate of pay exceeds one and one-half times the minimum wage; and 3) whose compensation mainly represents commissions on goods or services (i.e., more than half of the employee's compensation for a representative period is commissions). A retail or service establishment is one which derives 75% of its sales volume from the sales of goods and/or services that are not for resale and that are recognized as retail sales or services in the particular industry.

The federal district courts in Oregon and Washington agreed that an automobile dealership is a retail establishment under the definition set forth above. However, they concluded that finance and insurance managers, who handle financing and insurance aspects of the sale of an automobile and who are paid almost entirely by commissions, were not engaged in the dealership's retail activity and were not, therefore, covered by the retail exemption. These district courts determined that the finance and insurance managers did not meet the third prong of the retail exemption test because they earned commissions on warranties and financing as opposed to retail goods. The Ninth Circuit Court disagreed.

The Ninth Circuit Court held that the retail exemption is not limited to employees earning commission on only retail goods or services. The Court concluded instead that the exemption applies more broadly to all commission-earning employees of a retail or service establishment who meet the necessary compensation requirements. The Court distinguished the dealerships at issue in this case, which acted as single retail units, from retail businesses which operate separate and distinct finance and/or insurance businesses which do not constitute retail establishments. Because the duties performed by the finance and insurance managers were an integral and integrated part of their employer's auto dealership operations - retail operations - the Court concluded that they were employees of a retail establishment and exempt. Indeed, the Court pointed out that the managers did not operate and were not employed by separate finance or insurance businesses which would not be covered by the retail exemption.

The Ninth Circuit Court's decision impacts all retail and service establishments. Establishments selling furniture, home furnishings, floor coverings, appliances, clothing, and other retail items, which meet the definition of "retail or service establishment" set forth above, should analyze those employees who are engaged in financing, as opposed to sales, to determine whether they too can meet the retail exemption. Employers should be careful, however, with operations which can be construed as separate and distinct from the retail establishment to ensure that the exemption is not applied too broadly to cover employees that the Department of Labor and the courts may view as employed by another non-retail business.

The full decision of the Ninth Circuit Court of Appeals decision in Gieg v. DDR, Inc., 407 F.3d 1038 (9th Cir 2005) is available at:

http://www.ca9.uscourts.gov/ca9/newopinions.nsf/0E6DF928A73D864B88257005004E1BF1/
$file/0335619.pdf?openelement

Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.