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February 24, 2026
On January 5, 2026, the Wage and Hour Division (WHD) of the United States Department of Labor (WHD) issued four Opinion Letters addressing questions raised under the Fair Labor Standards Act (FLSA).
This article addresses the fourth of those four letters and is Part 4 of a 4-part series.
Opinion Letters provide official written interpretations from the WHD that address questions raised by individuals or organizations and explain how laws apply to specific factual circumstances. Opinion Letters are intended to promote transparent and consistent application of the FLSA, including to educate other individuals or entities that may be impacted by the issue presented.
In short, Opinion Letters provide valuable insights for employers and employees alike on important issues related to compensation and overtime rules.
The WHD’s fourth Opinion Letter (FLSA 2026-4) reviews two issues related to restaurant employees and commission-based employees. In Section 7(i)(1) and 7(i)(2), the FLSA exempts certain employees of retail or service establishments from overtime requirements where the employee’s: (1) regular rate of pay exceeds one and one-half times the federal minimum wage; and (2) compensation for a representative period is composed of more than 50 percent commissions. Essentially, if an employee in a retail or service establishment receives more than half of their compensation in commissions and earns more than 1.5 times the minimum wage, no overtime premium must be paid to the employee when the employee works more than 40 hours in the workweek.
In particular, the Opinion Letter addresses: (1) whether an employer in a jurisdiction where the state minimum wage exceeds the federal minimum wage must use the higher state minimum wage to determine whether it has satisfied the minimum pay standard in section 7(i)(1) for commissioned employees; and (2) whether tips are considered to be compensation for purposes of section 7(i)(2)’s requirement that more than half the employee’s compensation consist of commission.
The WHD confirmed that the 7(i)(1) overtime exemption uses the federal minimum wage standard, not a higher state or local minimum. The Opinion Letter also clarifies that voluntary customer tips are generally not “commissions” for purposes of determining whether more than 50% of compensation consists of commissions, except to the extent an employer, where permitted by law, takes a “tip credit” (i.e., a portion of tips applied toward payment of the required federal, state, or local minimum wage obligations). Service charges (e.g., a pre-determined charge keyed to the goods or services provided, such as a percentage of the customer’s bill) are also considered commissions.
For employers with food servers, the Opinion Letter includes a helpful example comparing two servers who worked more than 40 hours in a workweek to demonstrate the determination of their eligibility for the commission-based overtime exemption.
This article is designed to provide one perspective regarding recent legal developments, and is not intended to serve as legal advice. Always consult an attorney with specific legal issues.
