Friday, November 12, 2010

Employees Receiving Flat Rate Payments Not Eligible for Overtime

The U.S. Court of Appeals for the Fifth Circuit has ruled that an employer's method of compensating its call center employees qualified as a commission under the Fair Labor Standards Act (FLSA). As a result, the employees were not eligible for overtime if they worked more than 40 hours in a week [Parker v. NutriSystem, Inc., CA5, Dkt. No. 09-3545, 9/7/10].

The facts. NutriSystem, Inc. is a provider of weight loss and weight management products. It markets and sells its prepackaged meals directly to customers for personal use. Its core product is a 28-day meal program. Orders are generally placed by phone to a call center in Pennsylvania that employs approximately 230 sales associates. The meal packages cost customers between $293 and $372 per month.

Sales associates are assigned to one of six 40-hour work shifts. Each pay period, they receive the greater of either their hourly pay or a flat rate payment per sale. The hourly rate is $10 per hour for the first 40 hours per week, and $15 per hour for overtime. The flat rates per sale are $18 for each 28-day program sold via an incoming call during daytime hours, $25 for each 28-day program sold on an incoming call during evening or weekend hours, and $40 for each 28-day program sold on an outbound call or during the overnight shift. The flat rates do not vary based on the cost of the meal plan to the consumer.

The majority of the sales associates are compensated based on the flat rates noted above, not their hourly earnings. Under the flat rate compensation plan, sales associates do not receive overtime for working more than 40 hours in a week.

The sales associates filed a class action lawsuit, arguing that the flat rate pay plan was in violation of the FLSA because they were not eligible for overtime. A federal district court granted summary judgment to NutriSystem. The sales associates appealed the ruling.

The law. 29 USC 207(a) of the FLSA mandates that all employees be paid time and a half for any hours they work in excess of 40 per week. However, 29 USC 207(i) contains an exception to the overtime requirements for employees working in retail or service establishments (known as the “retail commission exception”). Under this exception, employees working in a retail or service establishment are not required to receive overtime for work over 40 hours in a week if: (1) their regular rate of pay is in excess of one and a half times the minimum wage rate; and (2) more than half of their compensation over a representative period (not less than one month) is commissions on goods or services.

There was no question that NutriSystem qualified as a retail establishment and that the associates' regular pay was more than one and a half times the minimum wage rate. The Fifth Circuit had to determine whether the pay represented “commissions on goods or services.” The term “commission” is not defined in federal statutes or regulations. The sales associates argued that to qualify as a commission under 29 USC 207(i), the fee paid to employees must be based on the final cost to the consumer. The associates claimed that NutriSystem's plan did not qualify as a commission because the flat rate payments were based not on the cost to the consumer, but on both the time of day that the sale was consummated and whether it was the result of an incoming or outgoing call. NutriSystem, on the other hand, asserted that its compensation scheme qualified as commissions because the pay of the sales associates varied across pay periods, their compensation was not linked to the number of hours worked, and the payments were proportional to the cost to the consumer.

The ruling. The Fifth Circuit agreed with the district court that the flat rate payments qualified for the FLSA's retail commission exception. The Fifth Circuit said that the flat rate payments, ranging from 5% to 14% of the price charged to the consumers, were sufficiently proportional to the cost to the consumer to qualify as commissions under 29 USC 207(i). The Fifth Circuit noted that compensation under the flat rate system was based on sales, not on the amount of time that a sales associate worked. The Fifth Circuit also believed that it was reasonable for NutriSystem to offer different commissions depending on the time of the sale and whether the sale was the result of an incoming or outgoing call. This system encouraged sales staff to take undesirable shifts and to work harder to close a sale on outgoing calls. In addition, the Fifth Circuit opined that NutriSystem's plan did not conflict with the intent of the FLSA, because the workers at issue earned between $40,000 and $80,000, and were therefore “not the lower-income-type employees contemplated to be protected” by federal overtime law.

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