3d Cir.: Flat-rate Payment Scheme Constituted Commissions; Nutrisystem Sales Associates 7(i) Exempt

Parker v. Nutrisystem, Inc.

This case was before the Third Circuit on Plaintiffs appeal of summary judgment in favor of Defendant.  Plaintiffs were sales associates, employed in Defendant’s call center, who completed sales orders on behalf of Defendant.  It was undisputed that Defendant’s business was “retail” in nature.  Thus, the only issue before the court was whether the District Court correctly concluded that NutriSystem’s method of compensating its call-center employees constituted a commission under the FLSA so that Nutrisystem was exempt from paying Appellants overtime.  The court concluded that the compensation constituted a commission and affirmed the ruling below.

Describing the pay methodology at issue, the Court said:

“In March 2005, NutriSystem implemented the compensation scheme for sales associates at issue in this case. Under the plan, sales associates receive the greater of either their hourly pay or their flat-rate payments per sale for each pay period. The hourly rate is $10 per hour for the first forty hours per week, and $15 per hour for overtime. The flat rates per sale are $18 for each 28-day program sold via an incoming call during daytime hours, $25 for each 28-day program sold on an incoming call during evening or weekend hours, and $40 for each 28-day program sold on an outbound call or during the overnight shift. These flat rates do not vary based on the cost of the meal plan to the consumer.

The majority of the sales associates are compensated based on these flat rates, not their hourly earnings. Under the compensation plan, sales associates do not receive overtime compensation when they are paid the flat rates for the sales made. There is no change to the flat rates when a sales associate works more than forty hours in one week.”

In affirming the decision that this pay constituted commissions under the FLSA, for the purposes of the 7(i) exemption, the Court reviewed  the legislative history of the applicable regulations, the limited case law and the DOL’s opinions and reference materials.

Dissenting, Judge Cowen took issue with the majority’s holding that commissions were proportional to the sales prices of the good sold here.  First, Judge Cowen noted:

“Unlike the majority, I would afford Skidmore deference to the Department’s view that in order to constitute a commission for purposes of § 7(I), the amount of compensation paid to the employee must be proportionally related to the amount charged to the customer. Because NutriSystem failed to demonstrate the requisite proportionality, its compensation plan cannot be considered a bona fide commission plan under § 7(I).”

Applying this definition to commissions, Judge Cowen reasoned that here, because the flat rates were not proportional to the products sold, the flat rates did not constitute commissions:

“The majority then concludes that NutriSystem’s compensation plan meets this definition because the payments made to its sales associates are “sufficiently proportional” to the cost to the consumer. Id . While I do not object to the majority’s contention that § 7(I) requires a proportional relationship between employee compensation and customer costs, I cannot agree that NutriSystem has demonstrated such a proportional relationship here.

It is undisputed that NutriSystem’s meal plans vary in price depending on the type of meal plan the customer chooses and the length of the customer’s commitment. It is likewise undisputed that the flat-rate fee paid to a sales associate does not vary depending on the type of plan the customer chooses or the length of the customer’s commitment. NutriSystem clearly has not demonstrated that the flat-rate fees are proportionally related to the cost to the customer. While neither the plaintiffs nor the Department suggests that a commission must be based on a strict percentage of the end cost to the consumer, the flat-rate payments in this case do not correspond at all with the end cost to the consumer. Rather, the flat-rate payments are based on the time the sale is made and whether it results from an incoming or outgoing call. The fact that NutriSystem can perform math to portray its flat-rate fees as percentages of customer costs does not transform the fees into commissions.

Therefore I am unable to agree with the majority and would reverse and remand for further proceedings.”

To read the entire decision and dissent click here.

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Filed under Commissions, Exemptions

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