Tuesday, September 7, 2010

Third Circuit Clarifies Definition Of "Commissions" Under FLSA

In Parker v. NutriSystem, Inc., the Third Circuit was asked to rule on the validity of the compensation plan offered by NutriSystem to its call-center employees. In holding that NutriSystem's employee compensation plan did not violate the Fair Labor Standards Act (FLSA), the Court clarified what constitutes a "commission" for purposes of the FLSA.

NutriSystem's plan compensated its call-center employees using one of two methods: (1) an hourly rate of $10/hour with overtime work compensated at $15/hour; or (2) payment of a flat-rate for each NutriSystem meal plan sold to consumers, which varied from $18 to $40 depending upon the time of day the meal plan was sold and whether such a sale was completed by an incoming or outgoing call. The majority of the employees in NutriSystem's call center were compensated using this second method.

The FLSA provides for an exception for employees in the retail or service industries whose compensation is more than one and one-half times the federal minimum wage and at least half of which represents commissions on goods or services. The plaintiffs, NutriSystem call-center employees, filed suit against NutriSystem arguing that the "flat-rate" payment option described above violated the FLSA because it did not constitute a "commission." Specifically, the plaintiffs argued that in order to be a "commission" under the FLSA, payments received by employees must be based upon the final cost to the consumer. Since the flat rates under the NutriSystem plan were based upon the times of day the sales were completed and whether those sales were originated via incoming or outgoing calls, the payment method did not constitute "commissions."

The Third Circuit disagreed, and held that so long as flat-rate payments made to an employee based on sales are proportionally related to the charges passed on to the consumer, those payments may be considered "commissions" for purposes of the FLSA. The Court specifically refused to adopt a test that required a "commission" under the FLSA to be strictly based on a percentage of the end cost to the consumer.

In this case, the Court held that because NutriSystem's flat-rate plan constituted a "commission" under the FLSA because: (1) the payments available to call-center employees were proportionally related to the costs of the various meal plans charged to consumers; (2) the plan clearly made compensation under the plan contingent upon sales made by call-center employees;(3) under the public policy goals of the FLSA it was reasonable for NutriSystem to offer different commissions depending upon the time of the sale and whether the sale was the result of an incoming or outgoing call, because such a pay structure encouraged staff to take undesirable shifts and work harder on closing sales on outgoing calls; and (4) the purposes of the FLSA were not offended by NutriSystem's flat-rate plan, because the call-center employees at issue were not the lower-income employees the FLSA was enacted to protect, employees must meet certain goals in order to be eligible to earn higher payment rates, and working long hours in a call-center does not carry with it the same danger of fatigue, health risks or accidents that can occur to manual labor employees.

You can read the Court's full opinion here: http://www.ca3.uscourts.gov/opinarch/093545p.pdf