If you’ve got kids, grandkids, nieces or nephews in the age range of 7 to 12, you may have found yourself in search of a certain toy loom this past holiday season, or perhaps you received a lovely loom bracelet as a holiday gift. For those of you scratching your heads, this "loom" is a plastic, rectangular toy with hooks that kids (well, anyone) can use to make bracelets (and other jewelry items) out of colorful little rubber bands.

Loom bracelets are now everywhere. In fact, I’ve spotted colleagues sporting these bracelets in the office. My niece made me three: a starburst, a triple single and a butterfly. As she was churning them out, I commented: "you should charge for each bracelet." Later, I thought: was I suggesting a piece-rate or commission-based compensation structure? There’s a big difference. Certain employees paid by commission are exempt from the FLSA’s overtime requirements. Employees paid on a piece-rate basis are not.

There’s a three-part test to qualify for the FLSA’s "commission exemption," and, not surprisingly, one requirement (among others) is that the employee must be paid by "commission." A recent district court case from the Northern District of Illinois provides some guidance what it means to be paid by commission. The case, Alvarado et al. v. Corporate Cleaning Service, Inc. et al, involved 24 current and former window washers seeking overtime pay, and the ultimate issue was whether the window washers were paid by commission or on a piece-rate basis.

The court said they were paid by commission because, in a commission-based system, "a sale is a precondition for the worker getting paid," and, here, "the window washers can count on compensation only when a sale is made." The court acknowledged that it was "less obvious" that the washers were paid by commission because they were one step removed from sales and had no control over whether a sale was made; however, the court said that an employee’s compensation can depend on sales even if the employee is not directly involved in sales.

The Alvarado court illustrated the distinction as follows (except that the court’s illustration involved a quilt maker, not my niece): Imagine that my niece has a contract to supply her colorful rubber band bracelets to a gift shop, and the shop will automatically pay her each time she provides a rubber band bracelet, regardless of whether a customer in turn buys that bracelet from the shop. To be sure, over time, the shop might tell my niece to make fewer rubber band bracelets if customer demand decreases. But in the end, my niece will still be paid for each bracelet made, instead of being paid for each bracelet sold by the gift shop.

Getting paid for each bracelet made is getting paid on a piece-rate basis whereas getting paid for each bracelet sold is getting paid on a commission basis (even if the employee getting paid had nothing to do with the actual selling).

The take-away here is that employers in retail and service industries may want to take a second look at their compensation structures to determine whether certain employees are getting paid by commission (even if in a "less obvious" way) and, if so, whether they qualify for the FLSA’s commission exemption. For those employers thinking about reclassifying their own rubber band bracelet makers (or any other employees) as exempt, be sure to consult an attorney before making changes to discuss the legal risks as well as to consider other jurisdiction-specific issues including applicable state law.