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November 12, 2010
Were Salespeople Paid Commissions, Or Were They Due OT?

A Pennsylvania call center employee led the way for 77 of his co-workers to sue their employer, claiming they should be paid overtime for all weekly hours worked over 40. The employer paid some workers an hourly rate plus overtime but paid others on the basis of the number of sales they made to customers. Is the latter system a “commission” arrangement?

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What happened. The call center employees worked for NutriSystem, which markets weight-loss meal plans directly to consumers. All salespeople were paid an hourly rate of $10, increasing to $15 for hours over 40 per week. But in 2005, the company changed its compensation program: Salespeople earned either the hourly rate or between $18 and $40 for each sale of a 28-day meal program to a customer, whichever system paid them more. For those paid per sale, they earned more for sales made during outgoing rather than incoming calls, and for sales made on the night shift than for those during the day shift.

NutriSystem looked at a particular section of the Fair Labor Standards Act (FLSA) and determined that the payment-per-sale qualified as a commission system. Employees covered by commission systems are not eligible for overtime payments. A judge in federal district court bought that argument and ruled for NutriSystem, dismissing the plaintiffs’ case. They appealed to the 3rd Circuit, which covers Delaware, New Jersey, and Pennsylvania.

What the court said. The federal Department of Labor (DOL), which interprets and enforces FLSA, contributed a brief on behalf of the plaintiffs. DOL backed up its opinion—that the NutriSystem per-sale payments don’t qualify as commissions—with opinion letters regarding three other industries. They were home alarm installers, health club instructors, and automobile dealers.

DOL’s rationale, which it said was at the core of the three letters, was that commissions must be linked to the cost of the goods or services sold to the customer. Since NutriSystem customer prices didn’t vary according to the type of call or time of day, the company’s payments weren’t commissions. But two out of three appellate judges sided against DOL, pronouncing NutriSystem’s compensation program a commission system that qualifies for the FLSA exception. Parker et al. v. NutriSystem, Inc., U.S. Court of Appeals for the 3rd Circuit, No. 09-3545 (2010).

Point to remember: As we’ve reported here, DOL during the current administration has adopted a very employee-friendly stance. That may be behind the agency’s assertion that NutriSystem’s salespeople deserved overtime as well as commission payments.

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