If you run a car dealership in Seattle, a furniture showroom in Denver, or an insurance agency in New York, you've probably wrestled with a question that sounds simple but isn't: when you pay someone mostly on commission, do you owe them overtime? For years, the honest answer was "it depends on who you ask." In January 2026, the Department of Labor finally gave a straight answer — and it's one that catches a lot of employers in high-minimum-wage states off guard.
The answer lives in a new opinion letter, FLSA2026-4, and it resolves a gap that has quietly sat in wage-and-hour law for decades: when you're testing whether a commissioned employee qualifies for the Section 7(i) overtime exemption, do you measure against the federal minimum wage or your state's (often much higher) minimum wage? The DOL says federal, full stop — and that answer has real consequences for how you classify and pay your commissioned staff.
What Section 7(i) Actually Is
The Fair Labor Standards Act (FLSA) generally requires overtime pay — time-and-a-half — for hours worked beyond 40 in a week. But Congress carved out an exemption in Section 7(i) specifically for retail and service employees who are paid mostly through commissions rather than an hourly wage. Think car salespeople, retail associates on commission, insurance agents, and similar roles where pay tracks sales rather than the clock.
To qualify for the 7(i) exemption, an employee has to clear two hurdles in a representative pay period:
- The regular rate test: their regular rate of pay — total compensation divided by hours worked — must exceed one and a half times the applicable minimum wage.
- The 50% commission test: more than half of their total compensation in that period must come from commissions on goods or services, not a base wage.
Clear both bars, and the employer doesn't have to pay overtime for that employee, no matter how many hours over 40 they work in a given week. Miss either one, and the exemption doesn't apply — the employee is owed overtime like anyone else.
That first test has an obvious ambiguity buried in it: "applicable minimum wage" according to which jurisdiction? The federal rate has been frozen at $7.25 an hour since 2009. Meanwhile states like Washington, California, and New York have pushed their minimum wages well past $16 or $17 an hour. If the "applicable" minimum wage is your state's number, the regular-rate bar an employee needs to clear is dramatically higher than if it's the federal number. That gap has sat unresolved for years, with employers and their counsel making educated guesses.
The DOL's Answer: Federal Minimum Wage, Always
FLSA2026-4 closes the gap directly. An employer in a state with a higher minimum wage asked the Wage and Hour Division exactly this question, and the agency's answer was unambiguous: Section 7(i) is measured against the federal minimum wage, regardless of what your state requires for baseline pay.
The Math
Under the current $7.25 federal minimum wage, a commissioned employee's regular rate of pay must exceed $10.875 an hour (1.5 × $7.25) to clear the first prong of the 7(i) test. That threshold doesn't move because you operate in Washington ($16.66), California ($16.90), or New York City ($17.00, as of this writing) — the federal floor is what the statute references, not the state floor.
Why the Statute Points to the Federal Number
The DOL's reasoning is narrower than a policy judgment call — it's a plain-text reading. Section 7(i) expressly cross-references Section 6 of the FLSA (29 U.S.C. § 206), which is the federal minimum wage provision, not a floating reference to "whatever minimum wage applies to this employee." Because the statute names a specific section of federal law rather than incorporating state law generally, the agency read it as fixed to the federal figure. States remain free to set higher minimum wages for baseline pay — that's untouched — but the exemption threshold under 7(i) is a federal number that doesn't fluctuate by geography.
Practically, this is good news for employers in high-minimum-wage states: it means the bar for exempting a commissioned employee from overtime is lower — and more achievable — than many payroll teams had assumed while trying to comply conservatively with a state-pegged standard.
The Two-Part Test You Still Have to Pass
Clarifying the minimum-wage reference doesn't eliminate the exemption's two-part test — it just fixes one variable. You still need to run both checks every representative pay period (commonly a month, though it can be shorter).
The Regular Rate Threshold
Add up all compensation for the period — base pay, commissions, nondiscretionary bonuses tied to sales, applicable service charges — divide by total hours worked, and confirm the result exceeds $10.875/hour (or whatever 1.5× the then-current federal minimum wage works out to, since that federal figure can itself change). Fall short, even by a few cents, and the exemption doesn't apply for that period.
The 50% Commission Rule
Separately, more than half of the employee's total compensation in the period has to come from commissions on goods or services — not from a base hourly or salary component. An employee earning a strong base salary plus modest commission kickers likely fails this test even if their total pay comfortably clears the regular-rate threshold. Both prongs have to be true simultaneously; one without the other doesn't qualify.
Tips, Service Charges, and Commissions — Don't Mix Them Up
The opinion letter also cleans up a related source of confusion: how tips and service charges factor into these calculations.
- Tips generally don't count toward the regular-rate or commission calculations — unless the employer is taking a tip credit to satisfy a minimum wage obligation, in which case the tip-credited amount is treated as wages for that purpose.
- Service charges are different from tips. When a business adds a service charge to a sale and distributes it to the employee, the DOL treats that as a commission, not a tip — so it counts fully toward the 50% commission threshold. A restaurant's mandatory 20% event-service charge distributed to a banquet coordinator, for example, functions like a commission for this test, not like a discretionary tip.
Employers who have been lumping tips and service charges together in payroll for exemption-testing purposes should separate them out — they're treated differently, and getting it wrong in either direction can flip an employee's exemption status.
Who This Actually Affects
Section 7(i) shows up most often in:
- Auto, boat, and RV dealerships — sales staff paid primarily on commission
- Furniture and big-ticket retail — showroom sales associates
- Insurance agencies — producers paid on new-business and renewal commissions
- Real estate-adjacent retail services — home security, solar, and similar door-to-door or showroom sales roles
- Some service businesses — home improvement estimators, high-ticket service consultants paid on commission
If any of your staff fit this pattern, FLSA2026-4 is worth a fresh look at your payroll classification — especially if you operate in a high-minimum-wage state and have been unsure whether to test against the state or federal figure.
What Happens If You Get the Classification Wrong
Misclassifying a commissioned employee as 7(i)-exempt when they don't actually clear both prongs is a real liability, not a technicality. The FLSA's statute of limitations runs two years for ordinary violations and three years for willful ones, and back-overtime claims typically come with liquidated (double) damages on top of the unpaid overtime itself. A single misclassified role, discovered years later during an audit or a departing employee's wage claim, can turn into a five-figure exposure fast — and it tends to surface across an entire job title at once, not just one person.
A Practical Compliance Checklist
- Identify every commissioned role currently treated as 7(i)-exempt.
- Re-run the regular-rate test using the current federal minimum wage (1.5× $7.25 = $10.875/hour today), not your state's rate, for each representative period.
- Separately verify the 50% commission test, excluding non-qualifying tips and correctly including service-charge distributions as commissions.
- Document the calculation for each pay period you rely on the exemption — not just once at hiring, since pay mix can shift month to month.
- Flag any employee who fails either prong in a given period and pay overtime for that period, even if they normally qualify.
- Revisit the analysis whenever the federal minimum wage changes — the exemption threshold moves with it.
Keep Your Payroll Records Straight
Running the 7(i) test correctly, period after period, depends on having clean, auditable records of exactly what each employee earned in base pay, commissions, and service charges — the kind of granular tracking that's easy to lose in a spreadsheet but straightforward when your books are structured for it. Beancount.io offers plain-text accounting that keeps every payroll entry transparent, version-controlled, and easy to audit later, whether that's for a DOL inquiry or your own peace of mind. Get started for free and see why developers and finance professionals are switching to plain-text accounting.