Restaurants and other service establishments that pay servers on commission have long relied on the Section 7(i) overtime exemption. In January 2026, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued Opinion Letter FLSA2026-4 answering two questions that trip up employers in audits. As a former WHD investigator, I have seen both issues surface in the field. Here is what the letter says and what to do about it. If you run a restaurant, see also our guide to FLSA compliance for restaurants.
What Section 7(i) Requires
Under 29 U.S.C. § 207(i), a retail or service establishment does not owe overtime to an employee if both of these are true over a representative period:
- Regular rate test: the employee’s regular rate is more than 1.5 times the federal minimum wage; and
- Commission test: more than half of the employee’s compensation comes from commissions.
The establishment must also qualify as a retail or service establishment, and the employer must keep accurate records. The exemption is tested for each workweek and each representative period, so it must be reviewed regularly. A representative period is at least one month.
Question 1: Federal or State Minimum Wage?
In a state where the minimum wage is higher than $7.25, which one do you measure against? The WHD said the federal minimum wage governs the Section 7(i) regular rate test. At $7.25, the threshold is about $10.875 per hour. A higher state minimum wage is irrelevant to the exemption itself.
Caution: this does not excuse state-law compliance. The employer must still pay at least the state minimum wage, and state overtime or wage claims can arise independently. Florida employers should also keep the state’s minimum wage and tipped wage increases in view.
Question 2: Do Tips Count as Compensation?
This is the issue with the biggest audit impact. The WHD concluded that bona fide tips are not commissions. Tips count as “compensation” for the “more than half” test only to the extent the employer actually relies on them to meet a wage obligation, such as a federal or state tip credit. Tips that are not used to satisfy a wage obligation are left out of the calculation.
The letter gives two examples. A server whose employer takes no tip credit and who earns commissions equal to all of her compensation meets the test. A server whose employer takes a $2.00 per hour state tip credit does not, because her commissions do not exceed her other compensation.
The Fourth Circuit Exception
The letter notes that the Fourth Circuit, in Wai Man Tom v. Hospitality Ventures (2020), held that all server tips count as compensation. Employers in that circuit should not rely on the letter to the extent it conflicts with that decision. Talk to counsel before changing your approach, and review the common triggers for a DOL wage and hour audit.
Where Employers Go Wrong
- Using a representative period that is too short or not documented.
- Skipping the test in slow weeks, when commissions can drop below the 50 percent line.
- Weak records. Payroll should show commissions, tips, any tip credit and the representative period, consistent with 29 C.F.R. Part 516.
7-Point Self-Check
- Does the establishment qualify as a retail or service establishment?
- Is the regular rate above 1.5 times the federal minimum wage in every pay period?
- Are commissions bona fide or service charges?
- Are commissions more than 50 percent of compensation over each representative period?
- Is any tip credit taken? If so, those tips count as compensation.
- Is the representative period at least one month and written down?
- Do payroll records support all of the above if an investigator asks?
FAQ
Does the opinion letter change the law?
No. It is the WHD’s official interpretation of existing law. Employers acting in good faith on it may have a defense under the Portal-to-Portal Act, but only on the facts presented in the letter.
Can I use the 7(i) exemption if I pay a tip credit?
Possibly, but the tips relied on for the credit count as compensation, which can make it harder for commissions to exceed 50 percent.
Does a higher state minimum wage change the 7(i) threshold?
No. The threshold uses the federal minimum wage, but you must still comply with state law.
Not Sure Whether Your Pay Plan Qualifies?
A Section 7(i) compliance audit reviews your pay structure, representative periods and records before the DOL does. Book a free consultation through our engagement options page or test your numbers with the Section 7(i) Commission Overtime Analyzer.
Related: Section 7(i) & Service Charge Compliance | FLSA Compliance for Restaurants | How Section 7(i) Helps Restaurants
Disclaimer: This post is for general information and is not legal advice. Application of the FLSA depends on specific facts. Consult qualified counsel or contact FA Consulting LLC for guidance on your situation. Source: U.S. DOL Wage and Hour Division, Opinion Letter FLSA2026-4 (Jan. 5, 2026).
Compliance is Cheaper Than Non-Compliance