Opinion letter · United States · Wage and Hour Division
Wage and Hour Division says the federal minimum wage sets the pay floor for the commission overtime exemption, and tips count as pay only when used for a tip credit
As of our last check on November 2, 2026, this is agency guidance, not a rule. It explains how the agency reads the law and does not create a legal requirement on its own.
Added to AmendSignal
In short
What changed
The Wage and Hour Division (WHD) issued an opinion letter on the Fair Labor Standards Act (FLSA) section 7(i) overtime exemption. It says the minimum pay test uses the federal minimum wage (a regular rate above $10.875 an hour), and that tips count as compensation in the commission test only when the employer takes a tip credit on them.
Who's affected
Retail or service establishments, such as restaurants, that treat commission-paid employees as exempt from overtime under section 7(i), especially in states with a higher minimum wage or a tip credit. The letter tells establishments in the Fourth Circuit's territory not to rely on it where it conflicts with a Fourth Circuit decision on tips.
What to do
This letter creates no new duties for employers. If you claim the section 7(i) exemption, consider checking each employee's regular rate against $10.875 an hour, counting any tip-credit tips as non-commission pay in each representative period, and continuing to pay any higher state or local minimum wage.
What changed
From the source · Opening paragraphs
an employee of a qualifying retail or service establishment paid more than one and one-half times the federal minimum wage satisfies the minimum pay standard in section 7(i)(1).
WHD says an employee of a qualifying retail or service establishment meets the section 7(i)(1) minimum pay standard when paid a regular rate above 1.5 times the federal minimum wage, currently above $10.875 an hour, even where a state minimum wage is higher.
From the source · General Legal Principles, B.2(b) Pay Requirement 2
Bona fide tips are not commissions for purposes of the Act
Also: Opinion, B. Circumstances Under Which Tips Can Be Considered Compensation
The Division therefore concludes that tips are “compensation” for purposes of section 7(i)(2) only to the extent that an employer, in fact, relies on them to meet a federal, state, or other wage obligation with respect to the employee
WHD says tips are not commissions, and that tips count as compensation in the section 7(i)(2) more-than-half-commissions test only to the extent the employer actually relies on them to meet a federal, state or other wage obligation, such as a tip credit.
From the source · Footnote 4
An employer’s non-compliance with a more protective state law (based on the state’s own law and definitions) might give rise to a state law claim, but it will not defeat the FLSA exemption if all of section 7(i)’s statutory requirements are met.
WHD says not meeting a more protective state law might lead to a state law claim, but does not defeat the FLSA exemption if all section 7(i) requirements are met.
From the source · Footnote 5
The Fourth Circuit appears to have reached a different conclusion, holding that all tips received by servers constitute “compensation” under section 7(i).
Establishments in the geographic territory of the Fourth Circuit should not rely on this opinion letter to the extent it is inconsistent with Wai Man Tom.
The letter notes that the Fourth Circuit has held that all tips received by servers are compensation under section 7(i), and tells establishments in that circuit's territory not to rely on the letter where it is inconsistent with that decision.
From the source · Closing
This interpretation may be relied upon in accordance with section 10 of the Portal-to-Portal Act
The letter is an official WHD interpretation that may be relied on under section 10 of the Portal-to-Portal Act, and it is based only on the facts the requester described.
Who is affected
From the source · Background
Your clients operate restaurants in a state with its own minimum wage and tip credit law; the State minimum wage exceeds the federal minimum wage.
The request came on behalf of restaurants in a state whose minimum wage exceeds the federal minimum wage and that has a tip credit law. The restaurants treat servers and server assistants as overtime exempt under section 7(i).
Our analysis · General Legal Principles, B. Section 7(i), 29 U.S.C. § 207(i) Requirements
The exemption applies to any employee of a retail or service establishment whose (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% commissions.
The reasoning is relevant to any retail or service establishment that claims the section 7(i) exemption for commission-paid employees, but the letter answers one requester's facts.
From the source · Footnote 5
Establishments in the geographic territory of the Fourth Circuit should not rely on this opinion letter to the extent it is inconsistent with Wai Man Tom.
Establishments in the Fourth Circuit's geographic territory are told not to rely on the letter where it conflicts with the Fourth Circuit's decision.
What it means in practice
Our analysis · Opinion, B. Example (Suzanne)
Suzanne’s $2,000 in commissions do not exceed her other compensation ($5,760 in base wages, plus $960 in tips used to satisfy a tip credit) during the designated representative period.
Therefore, she does not meet the primarily commissioned requirement at section 7(i)(2), and her employer cannot claim the section 7(i) overtime exemption for the relevant period.
Taking a tip credit adds non-commission compensation to the section 7(i)(2) test, which can cause an employee to fail it. In the letter's example, a server's $2,000 in commissions did not exceed $5,760 in base wages plus $960 in tip-credit tips, so the employer could not claim the exemption.
Our analysis · Opinion, B. Example (Meghan)
No portion of those tips constitute compensation under section 7(i) because her employer did not rely on them to meet its wage obligations in any workweek
Where an employer takes no tip credit, WHD's reading leaves tips out of the commission test entirely, as in the letter's example of a server whose commissions made up 100% of her compensation.
From the source · Opinion, B. (after examples)
it is imperative that employers regularly review any section 7(i) exemption designations to ensure that both pay requirements are met for each employee for the appropriate time periods.
WHD says it is imperative that employers regularly review section 7(i) exemption designations so both pay requirements are met for each employee for the right time periods.
From the source · Footnote 4
Some district courts have suggested that the highest applicable minimum wage, such as a state minimum wage, must be used to determine if an employee’s regular rate satisfies section 7(i)(1).
The letter acknowledges that some federal district courts have suggested the highest applicable minimum wage, such as a state rate, must be used for the section 7(i)(1) test. WHD disagrees with them.
What to do
AmendSignal analysis sorts these by whether this document changes them.
Already required
From the source · Footnote 2
Employers claiming the section 7(i) exemption are required to keep records of the employee’s pay and hours worked each workday and each workweek, and an appropriate representative period must also be designated and substantiated in the employer’s records.
Employers claiming the section 7(i) exemption keep records of each employee's pay and hours worked each workday and workweek, and designate and document a representative period. The letter cites this existing requirement from Code of Federal Regulations (CFR) 29 CFR 516.16 and 779.417(d).
From the source · Footnote 4
The FLSA explicitly does not “excuse noncompliance with any Federal or State law or municipal ordinance establishing a minimum wage higher than the minimum wage established under” the Act
Employers continue to comply with any higher state or local minimum wage. The letter cites the FLSA provision (title 29 of the United States Code, section 218(a)) that the federal law does not excuse noncompliance with a higher minimum wage.
From the source · General Legal Principles, A. The Act
the Act requires payment “at a rate not less than one and one-half times the regular rate at which [the employee] is employed” to all non-exempt employees for all hours worked over 40 in a workweek.
Non-exempt employees, including any employee who fails a section 7(i) test for a period, are owed overtime at 1.5 times the regular rate for hours over 40 in a workweek, as the FLSA (title 29 of the United States Code, section 207(a)(1)) requires.
Worth considering
Our suggestion · Opinion, A. Applicable Wage Rate for Purposes of Section 7(i)(1)
so long as the employee receives a regular rate of pay greater than 1.5 times the federal minimum wage, the employer satisfies the minimum pay standard in section 7(i)(1) for a particular workweek.
Consider checking, for each workweek you claim the section 7(i) exemption, that each employee's regular rate exceeds $10.875 an hour, and separately confirming that state or local minimum wage requirements are met.
Our suggestion · Opinion, B. Example (Suzanne)
The amount of tips her employer uses to meet its wage obligations (i.e., the state tip credit amount) is considered compensation for purposes of section 7(i)(2).
Consider reviewing how your payroll system runs the commission test: count any tips used for a federal, state or local tip credit as non-commission compensation, and leave out tips you do not use for a tip credit.
Our suggestion · General Legal Principles, B.2(b) Pay Requirement 2
comprise more than 50% of the employee’s compensation for a representative period of not less than one month.
Consider confirming that a representative period of at least one month is designated and documented for each section 7(i) employee.
Our suggestion · Footnote 5
Establishments in the geographic territory of the Fourth Circuit should not rely on this opinion letter to the extent it is inconsistent with Wai Man Tom.
If you operate in the Fourth Circuit's territory, consider asking your legal advisor how the Fourth Circuit's decision on tips affects your section 7(i) analysis before relying on this letter.
Open questions
The source leaves these open. We'll update this record if a later document answers them.
Can employers in the Fourth Circuit's territory still rely on the letter's answer about the federal minimum wage pay test?
The letter limits reliance there only "to the extent it is inconsistent with Wai Man Tom," and it discusses that decision only on the treatment of tips.
Will courts follow WHD's reading that the federal minimum wage, not a higher state rate, sets the section 7(i)(1) pay test?
The letter acknowledges that some federal district courts have suggested the highest applicable minimum wage must be used.
When does a service charge count as a commission for the section 7(i) test?
The letter says service charges keyed to sales commonly qualify and presumes the requester's do, but does not decide that question.
FLSA2026-4: Whether, for purposes of the overtime exemption for certain commissioned employees in section 7(i) of the FLSA, an employer in a jurisdiction in which the state minimum wage exceeds the federal minimum wage must use the federal minimum wage, or alternatively, the higher state minimum wage, to determine whether it has satisfied the minimum pay standard in section 7(i)(1), and whether tips are deemed compensation for purposes of section 7(i)(2)’s requirement that more than half the employee’s compensation consist of commissions. Source (opens in a new tab)
