Earlier this month, the U.S. Court of Appeals for the Third Circuit held that paying salespeople commissions that are not tied directly to the price of the product they sell does not necessarily render them ineligible for the retail commission exception to the overtime requirements of the Fair Labor Standards Act, 29 U.S.C. § 201, et seq. (the "FLSA"). In Parker v. NutriSystem, Inc., 2010 U.S. App. LEXIS 18691 (3d Cir. September 7, 2010), the Third Circuit held that payments could amount to "commissions" as long as they are based upon sales and "proportionally related" to the price of the product. In reaching this decision, the Court affirmed the decision of the trial court granting summary judgment for the employer.

The FLSA

The FLSA generally requires employers to pay employees oneand- a-half times their regular hourly rate if they work more than forty hours in a week. The FLSA provides an exception to this requirement for employees of a "retail or service establishment" who receive more than minimum wage and whose compensation is primarily derived from commissions. A retail or service establishment is a business with at least 75% of its annual sales of goods and services not for resale and that is recognized as retail in its particular industry.

The Facts

Defendant NutriSystem, Inc. ("NutriSystem"), a weight loss company that sells prepackaged meals to customers, offers 28-day meal plans that customers may purchase every four weeks or that renew automatically. NutriSystem employs sales associates who answer incoming calls and make outgoing telemarketing sales calls. NutriSystem pays associates on an hourly basis or with flat-rate payments based upon the number of sales completed, whichever is greater. Sales associates receiving flat-rate payments do not receive overtime pay. The amount of each flat-rate payment depends upon whether a sale occurred during evening or weekend hours, whether the sale was the result of an incoming or outgoing call, and whether the customer agreed to enroll in the automatic renewal program.

The District Court

Plaintiff Adrian Parker, a former NutriSystem sales associate, initiated a collective action in the U.S. District Court for the Eastern District of Pennsylvania alleging that NutriSystem violated the FLSA by failing to pay sales associates overtime. NutriSystem moved for summary judgment, arguing that the retail commission exception applied to its sales associates and, therefore, they were not entitled to overtime pay. Plaintiffs responded that the retail commission exception only applies to employees earning a "bona fide commission rate" and that their flat-rate payments did not satisfy this requirement.  

The District Court granted NutriSystem's motion. Plaintiffs appealed.

The Third Circuit

The Third Circuit affirmed.

In determining the applicability of the retail commission exception, the Third Circuit focused on whether NutriSystem's payments to sales associates constituted a "commission," a term that the FLSA does not define. Consequently, the Court reviewed the FLSA's legislative history and statutory purpose, decisions from other circuits and the Department of Labor's previous interpretations of the term.

Based upon its review of these sources, the Court concluded that NutriSystem's flat-rate plan constituted a "commission" plan under the FLSA. According to the Court, "when flat-rate payments made to an employee based on that employee's sales are proportionally related to the charges passed on to the consumer, the payments can be considered a bona fide commission rate" for purposes of the retail commission exception to the FLSA's overtime requirement. The Court did not define the precise scope of the phrase "proportionally related," but expressly rejected the argument advanced by plaintiffs - and the Department of Labor in an amicus brief - that a commission must be directly related to the sales price of the product sold.

Here, although the payments were not calculated specifically as a percentage of the cost of the product sold, the Court explained that they were consistent with the FLSA's "retail commission exception" because they were based on the value that NutriSystem received from each sales associate's work. The Court also highlighted that the payments were not linked to the actual amount of time that a sales associate worked. According to the Court, the absence of a correlation between pay and time worked is a "hallmark" of commissions.

Moreover, according to the Court, NutriSystem's compensation plan was consistent with Congress' purpose in creating the FLSA's overtime requirements. First, NutriSystem's sales staff was well compensated and, therefore, did not fall within the class of employees whom the FLSA's overtime requirement was designed to protect. Second, NutriSystem's compensation plan did not discourage NutriSystem from hiring additional sales associates, because only NutriSystem's top sales associates were permitted to work more than forty hours per week. Therefore, forcing NutriSystem to pay its sales associates overtime would not induce NutriSystem to hire additional staff. Third, according to the Court, given the nature of their office work, sales personnel who work more than forty hours a week are not at any real increased risk of workplace accidents caused by exhaustion or overexertion.

Bottom Line

Employers relying upon the retail commission exception to the FLSA's overtime requirement should review their plans to ensure that payments to employees may properly be characterized as commissions. Given the Third Circuit's holding in Parker v. NutriSystem, Inc., such payments need not constitute a specific percentage of the price of a product or service sold. However, payments must be based upon sales and proportionally related to the consumer's costs.