At a Glance
- Federal minimum wage controls FLSA Section 7(i)’s pay threshold. For purposes of the federal commissioned-employee overtime exemption, employers may rely on the federal minimum wage—rather than a higher state or local minimum wage—when determining whether an employee’s regular rate exceeds one-and-one-half times the minimum wage.
- Tips are not commissions and are treated as “compensation” for purposes of Section 7(i)(1) in limited circumstances only. Employee tips generally are excluded from the Section 7(i)(1) analysis unless the employer relies on a portion of those tips to satisfy a federal, state, or local wage obligation (i.e., through a tip credit).
On January 5, 2026, the U.S. Department of Labor’s Wage and Hour Division issued an opinion letter (FLSA2026-4) clarifying how employers should apply the Fair Labor Standards Act’s (FLSA) Section 7(i) overtime exemption for certain commissioned-paid employees.
The letter addresses two questions that frequently arise in federal wage-and-hour litigation and in compliance audits:
- Whether the federal minimum wage or a higher state minimum wage must be used when determining whether an employee satisfies Section 7(i)’s minimum pay requirement; and
- Whether and to what extent employee tips must be counted when determining whether an employee is primarily paid by commissions for purposes of Section 7(i)’s requirements.
Employers in the hospitality, retail, and service sectors—particularly those that rely on service...
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