Employees who worked for a NutriSystem call center sued the company, alleging they were entitled to overtime. The call center used two different methods of payment — one based on an hourly rate and the other based on a flat rate system. Employees who were paid based on the flat rate system did not receive overtime.

One exception to the overtime requirement under the Fair Labor Standards Act (FLSA), is the retail commission exception. (http://www.dol.gov/whd/regs/compliance/whdfs20.htm)

In order to qualify for the retail commission exception:

  • Employees must be employed at a retail or service establishment
  • The regular rate of pay must be at least one and a half times the minimum wage, or more than $10.88 an hour (this must be based on a representative period of not less than one month)
  • Employees must receive more than half of their pay from commissions

In this case, there was not any dispute about whether the NutriSystem call center qualified as a retail establishment. (http://www.dol.gov/whd/regs/compliance/whdfs6.htm) Instead, the sole issue was whether the flat rate system qualified as a commission. NutriSystem had five meal types, each with two different prices, which varied depending on whether the customer signed up for automatic future shipments. The flat rate did not depend on the price of the sale, but instead varied based on whether it was the result of an inbound or outbound call, and whether the sale was during daytime hours or during evening/weekend hours. The court noted the flat rate system created an incentive for employees to make outbound calls and to work the less desirable evenings and weekends, since those sales received a higher flat rate. (http://www.businessweek.com/smallbiz/news/coladvice/ask/sa991104.htm)

As the court pointed out, the FLSA does not define the term “commission.” The employees argued that the flat rate paid was not a commission because it did not vary based on the cost to the consumer — in other words, it was not a percentage of the fee or sales price. The DOL filed a brief in support of the employees and relied on its prior opinion letters that concluded a flat rate payment did not qualify as a commission. The court decided that although a commission is most typically a percentage of the price to the customer, being paid a percentage was not a strict requirement for a commission payment plan. In part, the court was persuaded because the payment to the employee was proportionally related to the sales made by employee, even though it was not a percentage of price.