The First Circuit Court of Appeals recently affirmed a lower court’s decision that an employer may use the fluctuating workweek method to calculate overtime pay rates even when an employee’s weekly pay varies because of performance-based commissions. Lalli v. General Nutrition Centers, Inc., No. 15-1199 (February 12, 2016).

Background

Joseph Lalli, a former nonexempt General Nutrition Centers (GNC) store manager, alleged that GNC had violated the Fair Labor Standards Act (FLSA) and the Massachusetts Minimum Fair Wage Law by failing to pay him one-and-one-half times his regular compensation for the hours he worked in excess of 40 hours per week. While employed with GNC, Lalli received a guaranteed weekly salary and a nondiscretionary store manager’s commission based on a percentage of sales. The commissions were computed and paid with Lalli’s base pay on a biweekly basis, and the amount of the commissions varied from week to week. GNC filed a motion to dismiss, which the district court granted. Lalli appealed.

GNC used the fluctuating workweek (FWW) method to determine Lalli’s compensation, factoring commissions into the regular weekly salary. Under the FWW method, GNC would (1) add together Lalli’s guaranteed fixed salary for the week with his earned commissions that week; (2) divide the total wages (including commissions) by the number of hours he had logged for that week; and (3) pay Lalli an additional 50 percent overtime premium on top of the regular rate for any hours worked in excess of 40 hours that week.

However, because the commission figures were included in computing the regular hourly rate and because commissions were variable, Lalli alleged that GNC had not paid him a fixed amount as straight-time pay and that it was improper for the company to have used the FWW approach in calculating his overtime.

The First Circuit’s Decision

Relying on 29 C.F.R. §§ 778.114 and 778.118 and other cases, the First Circuit ruled that the payment of performance-based commissions did not violate § 778.114’s requirement that a fixed weekly salary be paid. In this case, the court found that the salary was fixed regardless of the number of hours that the employee had worked and that only the amount of commissions varied, based upon the employee’s effort resulting in sales. 

The court also rejected the argument that a 2011 interpretive bulletin issued by the U.S. Department of Labor (DOL) prohibited the payment of performance-based commissions under the FWW methodology. In addition, the court found that, “[i]f anything, the DOL bulletin indirectly approved of the developing distinction between time-based and performance-based bonuses.” The DOL bulletin, in finding the FWW invalidated with the payment of additional amounts, cited only cases that were hours-based with no discussion of performance-based commissions.

Practical Impact

This decision shows that, when evaluating whether an employee’s compensation structure is permissible, courts recognize the distinction between hours-based bonuses and performance-based commissions.