S.D.Ohio: Hybrid Salary Plus Commissions Plan Violated FLSA, Because Commissions Did Not Comprise More Than 50% Of Wages; 7(i) Exemption Not Applicable

Keyes v. Car-X Auto Services

This case was before the Court on Plaintiff’s Motion for Summary Judgment, relative to his FLSA claims.  Defendants contended that they were entitled to the exemption from the overtime wage requirement under 7(i) of the FLSA, 29 U.S.C. § 207(i), the so-called “Retail Exemption,” because Plaintiff’s regular rate of pay exceeded one and one-half times the minimum wage rate and over half of Plaintiff’s compensation came from commissions earned on the sale of goods and services.  The Court granted Plaintiff’s Motion, explaining that Defendants were not entitled to the benefit of 7(i), because they were unable to show that 50% or more of Plaintiff’s income was derived from commissions, as differentiated from salary.

Discussing the elements of the Retail Exemption and applying the exemption to the pay policy at issue, the Court explained, “The parties do not dispute that Defendant Car-X is a retail establishment or that Plaintiff’s regular rate of pay exceeded one and one-half times the minimum wage rate. Thus, the issue before the Court is whether more than one-half of Plaintiff’s compensation consisted of commissions on goods or services.

Federal regulations recognize that employees of retail or service establishments are usually compensated in any one of five ways:

(1) Straight salary or hourly rate: Under this method of compensation the employee receives a stipulated sum paid weekly, biweekly, semimonthly, or monthly or a fixed amount for each hour of work.

(2) Salary plus commission: Under this method of compensation the employee receives a commission on all sales in addition to a base salary (see paragraph (a)(1) of this section).

(3) Quota bonus: This method of compensation is similar to paragraph (a)(2) of this section except that the commission payment is paid on sales over and above a predetermined sales quota.

(4) Straight commission without advances: Under this method of compensation the employee is paid a flat percentage on each dollar of sales he makes.

(5) Straight commission with “advances,” “guarantees,” or “draws.” This method of compensation is similar to paragraph (a) (4) of this section except that the employee is paid a fixed weekly, biweekly, semimonthly, or monthly “advance,” “guarantee,” or “draw.” At periodic intervals a settlement is made at which time the payments already made are supplemented by any additional amount by which his commission earnings exceed the amounts previously paid.29 C.F.R. § 779.413(a).

By definition, each of these compensation plans, except for the “straight salary or hourly rate,” qualify as “bona fide commission plans” under § 207(i). Viciedo v. New Horizons Computer Learning Center of Columbus, LTD, 246 F.Supp.2d 886 (S.D.Ohio 2003).

Under Defendant’s compensation plan, employees were paid the greater of either the commission rate on the total gross sale of services and products attributable to the employee during a given pay period or a “default” guaranteed wage rate, which was calculated by multiplying the employee’s regular hourly rate by the number of hours actually worked in a given pay period. (Deposition of Robert Keyes at 14, 15-16, 101-02, 213-17; Govind Aff. at ¶¶ 10-14, Govind Dep., Ex. 3, Employee Sales/Commission Reports). Car-X did not calculate a setoff or overpayment in weeks in which Plaintiff earned extra for commissions. (Keyes Dep. at 101-102; Govind Dep. at 104-105). While Defendants avoid designating which of the above examples under 29 C.F.R. § 779.413(a) best fits the characteristics of Car-X’s compensation plan, Plaintiff argues that Defendants’ compensation plan is based on a hybrid system and is not a bona fide commission plan under the FLSA. As in Viciedo, we find the present facts remarkably similar to those in Donovan v. Highway Oil Inc., Case No. 81-4245, 1986 WL 11266 at *4 (D.Kan. July 18, 1986), in which that court found the defendant’s compensation plan possessed the characteristics of both a salary plus commission plan and a quota bonus plan. In Donovan, managers of a gas station bringing suit to recover overtime wages allegedly due under the FLSA were paid a set commission for selling a threshold amount of gasoline, and then a small commission for each additional gallon of gasoline sold in excess of the threshold amount. The court found that “the only true commission portion of the salaries appears to be those amounts over the threshold level” and that the amount of said commissions did not meet the requirements of 29 C.F.R. § 207(i) as they did not comprise more than half of the managers’ compensation. Donovan, 1986 WL 11266 at *4. While Defendants argue that all Car-X technicians were paid based on commissions from services and products sold, we find, as did the court in Donovan, that the plan’s operation, as explained by Defendants’ witness and Plaintiff himself, belies such an argument. (See Govind Dep. at 60-62, 65-66, 72; Ex. 3, Employee Sales/Commission Reports; Keyes Dep. at 14, 101-102, 213-17). For this reason, we find that the default guaranteed wage represents a salary and only that amount in excess of such constitutes the true commission portion. Defendant has failed to demonstrate that more than fifty percent of Plaintiff’s compensation for any representative period consists of commissions.”

Accordingly, the Court granted Plaintiff’s Motion for Summary Judgment as to his FLSA claim.

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Filed under Commissions, Exemptions

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