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N.D.Tex.: Debt Settlement Company Not a “Retail or Service Establishment”
Parker v. ABC Debt Relief, Ltd. Co.
This case was before the court on the parties’ cross motions for summary judgment, regarding a variety of issues. As discussed here, one of the issues concerned the applicability of the so-called retail sales exemption, commonly referred to as 7(i), to defendant, a debt settlement company. The court held that the defendant was not a “retail or service establishment” within the meaning of 7(i), and held that the plaintiffs were not retail or service exempt as a matter of law.
Rejecting the defendant’s argument that the plaintiffs were subject to the retail exemption, because they engaged in telephone sales of a specific retail product to the general public, the court explained:
To determine whether an employer is a “retail or service establishment,” courts look to the former statutory definition in Section 13(a)(2) of the FLSA, 29 U.S.C. § 213(a)(2), which defines a “retail or service establishment” as one in which 75% of the annual dollar volume of sales of goods or services is “not for resale” and “is recognized as retail sales or services in the particular industry.” See 29 C.F.R. 779.319; Geig, 407 F.3d at 1047.
“Determination of whether a business fits the retail concept is not without difficulty.” Brennan, 477 F.2d at 296. In making their determinations, courts consistently rely on the expertise of the Department of Labor, which has promulgated an extensive series of regulations and interpretive rules that accompany the statute. See 29 C.F.R. § 779.300 et seq. Although courts are not bound by interpretative bulletins, they do provide guidance because they reflect the position of those most experienced with the application of the Act. Brennan, 477 F.2d at 296–97. Courts must consider all circumstances relevant to the business at issue. 29 C.F.R. 779.318(b).
After quoting the relevant section of the CFR, the court reasoned:
The Department of Labor’s regulations consistently emphasize that the exemption is meant to apply to “traditional” local retail establishments. 29 C.F.R. §§ 779.314, 779.315, 779.317. To assist the public, the regulations identify certain establishments as traditional local retail or service establishments—e.g., restaurants, hotels, barber shops, and repair shops. The regulations also seek to assist the public by identifying establishments that do not fall within the exception—e.g., insurance companies that sell insurance and electric companies that sell power. 29 C.F.R. §§ 779.316, 779.317. The Fifth Circuit has noted this ” ‘demonstrates that not everything the consumer purchases can be a retail sale of goods or services’ and ‘industry usage is not controlling.’ ” Brennan, 477 F.2d at 295 (citation omitted).
The regulations elaborate further on the definition by stating that “an establishment, wherever located, will not be considered a retail or service establishment within the meaning of the Act, if it is not ordinarily available to the general consuming public.” 29 C.F.R. § 779.319. “An establishment does not have to be actually frequented by the general public in the sense that the public must actually visit it and make purchases of goods or services on the premises in order to be considered as available and open to the general public. A refrigerator repair service shop, for example, is available and open to the general public even if it receives all its orders on the telephone and performs all of its repair services on the premises of its customers.” Id.
In this case, Defendants operated a debt settlement business from the eighth and tenth floors of an office building in Dallas, Texas. There were three main aspects to this debt settlement operation—sales, customer service, and negotiation with creditors. The Salespeople recruited the clients. They were constantly making telephone calls (around 300 calls a day)—to prospective customers all over the country—trying to sell a service. This is not the type of service that is utilized by the general public in the course of their daily living. Defendants were not “serv[ing] [an] everyday need [ ] of the community.” Defendants did not operate from a store front. They did not serve the general public by providing a retail product or service in the traditional sense. Defendants’ debt negotiation and settlement business was similar to other establishments that lack a “retail concept”—such as banks, brokers, credit companies, and loan offices. 29 C.F.R. § 779.317.
For these reasons, the Court finds that Defendants did not establish their burden of proving they operate a retail or service establishment within the meaning of the FLSA. The Court hereby DENIES Defendants’ motion for summary judgment on the retail or service establishment exemption and finds as a matter of law the salespeople Plaintiffs are not exempt from overtime pay under the retail or service exemption.
Click Parker v. ABC Debt Relief, Ltd. Co. to read the entire Memorandum Opinion and Order.
N.D.Cal.: Life Insurance Broker Not a “Retail or Service Establishment;” 7(i) Retail Sales Exemption Inapplicable
Burden v. SelectQuote Ins. Services
This case was before the court on the defendant’s motion for summary judgment. As discussed here, Defendant, a life insurance agency, argued that plaintiffs, its life insurance brokers, were exempt from the FLSA’s overtime provisions pursuant to the so-called retail sales exemption. While the court held that defendant could make out 2 of the 3 elements required for application of the exemption, ultimately it held that the exemption was inapplicable because defendant lacked a retail concept.
Pursuant to Section 7(i), certain employees are exempt from the FLSA’s overtime provisions if three conditions must be met: (1) the employee must be employed by a retail or service establishment; (2) the employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked; and (3) more than half the employee’s total earnings in a representative period must consist of commissions. Here, the court held that the defendant could not satisfy element (1) and therefore the exemption did not apply.
Analyzing the issue, the court reasoned:
“Section 779.317 expressly identifies “insurance” as being among the “list of establishments to which the retail concept does not apply.” 29 C.F.R. § 779.317 (identifying: “Brokers, custom house; freight brokers; insurance brokers, stock or commodity brokers” and “Insurance; mutual, stock and fraternal benefit, including insurance brokers, agents, and claims adjustment offices.”) (emphasis added). SelectQuote acknowledges that “[i]nsurance” and “insurance brokers” are expressly identified in § 779.317, but nonetheless asserts that § 779.317 is inapposite because it is operating a “new type of business” that is “not covered by the Insurance Industry exclusion from the ‘retail concept’ in the FLSA regulations.” Mot. at 18.
As support for its position, SelectQuote relies principally on two out-of-circuit cases, which ostensibly concluded that a business lacking a retail concept under § 779.317 may nonetheless qualify for the retail or service exemption. Mot. at 18–19. In Hodgson v. Centralized Servs., Inc., 457 F.2d 824 (4th Cir.1972), the court held that an income tax preparation service qualified as a retail or service establishment under the FLSA, notwithstanding a prior DOL interpretation stating that “accounting firms” lacked the retail concept. Id., 457 F.2d at 827. In reaching its decision, the court noted that the DOL’S pre–1949 exclusion of “accounting firms” should not “arbitrarily embrace the unsophisticated business activities of the defendants in an area of service which came into being and had developed throughout the country only during the past decade.” Id.
In Selz v. Investools, Inc., No. 2:09–CV–1042 TS, 2011 WL 285801 (D.Utah Jan.27, 2011), the court ruled that a company that marketed products and services to educate individuals on how to personally invest in exchange markets online and aid them in doing so did not qualify as one of the specific establishments exempt from the retail exception. While noting that that § 779.317 specifies that educational institutions, finance companies and investment counseling firms lack a retail concept, the employer, “as a marketer of materials that teach and aid individuals to do their own financial investing, does not fit into the traditional concept of an educational institution, such as a for-profit university; a finance company, such as a bank; or an investment counseling firm.” Id. at *6 (emphasis added). The court concluded that “marketing tools to aid individuals in independently investing personal funds is its own industry” and therefore § 779.317 was not a bar to the FLSA exemption afforded under 29 U.S.C. § 317(i). Id .
SelectQuote claims that like the businesses in Hodgson and Selz, it too has developed a business model that is not encompassed in § 779.317. According to SelectQuote, its direct marketing approach “turned the life insurance industry on its head” by having its agents contact prospective customers by telephone instead of in person-more like the independent broker model traditionally existing in the property and casualty insurance business. Mot. at 2. In SelectQuote’s words, “One of the old adages in the insurance industry before 1985 was that property and casualty insurance was bought and life insurance was sold. SelectQuote’s insight was to change that paradigm so that life insurance too could just be bought by the average consumer.” Id.
SelectQuote’s self-aggrandizing arguments for avoiding the preclusive effect of § 779.317 are unavailing. In both Hodgson and Selz, the type of businesses operated by the defendants did not previously exist. In Hodgson, the court noted that the defendant’s tax preparation service had then only come into existence within a relatively recent period of time. 457 F.2d at 827. Likewise, in Selz, the court focused on the fact that the defendant’s business of selling do-it-yourself investment materials did not fall under the rubric of a bank, finance company or educational institution. 2011 WL 285801, at *6. In contrast, SelectQuote’s business bears none of the hallmarks of a new type of business establishment. Although SelectQuote has changed the method by which an agent sells life insurance—namely, directly by telephone instead of face-to-face—the fact remains that SelectQuote is still selling life insurance.
Moreover, SelectQuote’s own statements purporting to explain why its business supposedly is so revolutionary underscores the logical flaws in its argument. Section 779.317 identifies “Insurance” and “insurance brokers”—not “life insurance” or “term life insurance”—as establishments lacking a retail concept. See 29 C.F.R. § 779.317. Ironically, what SelectQuote claims to be “new” is not new at all; rather, as SelectQuote itself acknowledges, it simply is employing direct marketing methods that have long been used in the property and casualty insurance business. Singh Decl. ¶ 5. In other words, SelectQuote has made life insurance sales more like the traditional insurance brokerages, which clearly are within the scope of § 779.317. In Hodgson and Selz, the defendants changed a specifically-listed industry so fundamentally as to distinguish it from an industry listed in section 779.317. See Selz, 2011 WL 285801, at *6; Hodgson, 457 F.2d at 827. The logic of those cases does not apply in cases such as the present, where a company simply has changed its business to be more like a business which indisputably falls within the scope of § 779.317. For these reasons, the Court finds that SelectQuote falls within the insurance brokerage industry that section 779.317 finds to lack the requisite retail concept to qualify for an exemption from the FLSA’s overtime requirements.
As an alternative matter, SelectQuote argues that the Court should decline to apply § 779.317 on the ground that it lacks a rational basis for concluding that insurance establishments are not exempt as a retail or service establishment. Mot. at 20–22. According to SelectQuote, “[s]ection 779.317 is an ‘antiquated interpretation’ that does not take into account the fundamental changes over the past four decades regarding what is considered a ‘retail or service establishment,’ and it should not preclude SelectQuote from applying the section 7(i) exemption to Burden.” Id. at 22.
To support its position, SelectQuote points to cases where courts have declined to defer to the DOL’s list of non-retail establishments set forth in § 779.317 where there is no discernable rational basis for the DOL’s determination that type of business lacks a retail concept. See Martin v. The Refrigeration Sch., Inc. ., 968 F.2d 3 (9th Cir.1992) (holding that there was no rational basis for § 779.317‘s distinction that “[s]chools (except schools for mentally or physically handicapped or gifted children)” lack a retail concept); Reich v. Cruises Only, Inc., 1997 WL 1507504, at *5 (M.D.Fla. June 5, 1997) (finding that there was no rational basis for the DOL’s inclusion of “[t]ravel agencies” as establishments lacking a retail concept). However, these cases are distinguishable in that they did not involve the insurance industry. Moreover, the Supreme Court has held that the inclusion of financial companies, including insurance establishments, in § 779.317 is proper. See Mitchell, 359 U.S. at 290–91.
In light of the above, the Court finds that § 779.317 is a persuasive embodiment of the Department of Labor’s “body of experience and informed judgment.” See Skidmore, 323 U.S. at 140. The Court further finds that SelectQuote has not shown “plainly and unmistakably” that Burden’s exemption was within the “terms and spirit” of the FLSA. See Arnold, 361 U.S. at 392. As an insurance broker, SelectQuote is not a “retail or service establishment” and thus is not exempt from the FLSA’s overtime requirements. See 29 U.S.C. § 207(a); 29 C.F.R. § 779.317. Therefore, SelectQuote is not entitled to summary judgment of Burden’s second cause of action. See Fed.R.Civ.P. 56(a).”
Click Burden v. SelectQuote Ins. Servicesto read the entire Order Granting in Part and Denying in Part Defendant’s Motion for Summary Judgment. For further information on the the 7(i) exemption generally, see DOL Fact Sheet #20: Employees Paid Commissions By Retail Establishments Who Are Exempt Under Section 7(i) From Overtime Under The FLSA.
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.
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.
N.D.Ga.: “Design Consultant” For Furniture Store, Paid Strictly Commissions, Retail Exempt Under 7(i)
Lee v. Ethan Allen Retail, Inc.
Plaintiff brought this case based on 200-250 hours she claimed to have worked in overtime for Defendant, which she was not paid for. Defendant maintained the Plaintiff was subject to the so-called retail exemption of 7(i). Before the Court was Defendant’s Motion for Summary Judgment on the retail exemption issue. The Court granted Defendant’s Motion, holding that Plaintiff was paid under a bona fide commission plan throughout her employment with Defendant, despite the fact that she never received anything other than her bi-weekly draw.
The Court relied on the following facts:
“Defendant Ethan Allen owns and operates Ethan Allen Design Centers (“Design Centers”) throughout the United States. These Design Centers are retail establishments, which sell Ethan Allen home furnishing products. Plaintiff began working as a Design Consultant on August 6, 2006, at Ethan Allen’s Peachtree City, Georgia Design Center. Plaintiff worked as a Design Consultant throughout her employment with Ethan Allen. As a Design Consultant, Plaintiff’s primary job responsibility is selling Ethan Allen home furnishing products. Design Consultants, including Plaintiff, are paid on a commission basis. They are never paid a salary. After an initial two week training period, Plaintiff began making sales and earning commissions. Ethan Allen paid Plaintiff according to its written Design Consultant Compensation Plan (“Compensation Plan”). Pursuant to this Compensation Plan, Design Consultants earn a minimum of 7% commission on net written sales per fiscal month. The commission increases to 8% if the Design Consultant has sales of at least $45,000, 8.5% at $55,000, and 9% at $70,000. Design Consultants earn a commission on every dollar of their sales; there are no caps on the amount of commissions a Design Consultant can earn.
During the first four months of employment, Ethan Allen pays its Design Consultants through a non-recoverable, bi-weekly draw. Every month Ethan Allen reduces the Design Consultant’s commissions by the amount of the draw. The Design Consultant earns commissions on sales that exceed her draw. Because the draw is non-recoverable, Design Consultants do not have to repay Ethan Allen if the amount of their draw exceeds their commissions during the month. After the initial four month period, however, Ethan Allen pays its Design Consultants through a bi-weekly, recoverable draw. Accordingly, if a Design Consultant does not earn enough in commissions to cover the draw, the Design Consultant carries forward a deficit, which she owes to Ethan Allen. Ethan Allen then reduces any deficit from prior months by the amount that her commissions exceeded the draw.
Plaintiff received a bi-weekly draw of approximately $1,100. Although Plaintiff earned commissions that exceeded her draw in four of the fourteen months she was employed at Ethan Allen, she never received an additional commission payment beyond her draw because throughout her employment at Ethan Allen she maintained a cumulative deficit as a result of her failure to earn enough commissions to cover her draw in prior months. When Ethan Allen terminated, Plaintiff she had an accumulated deficit of $4,610.14.”
Discussing the retail exemption, and granting Defendant’s Motion the Court stated, “The retail or service establishment exemption applies where: (1) the employee was employed by a retail or service establishment; (2) the employee’s regular rate of pay was more than one and one-half times the minimum hourly rate; and (3) more than half of the employee’s compensation comes from commissions. 29 U.S.C. § 207(i); 29 C.F.R. § 779.412; see also Schwind v. EW & Assocs. Inc., 371 F. Supp 2d 560, 563 (S.D.N.Y.2005). As the employer, Defendant bears the burden of proving the applicability of this exemption by ” ‘clear and affirmative evidence.’ ” Klinedinst, 260 F.3d at 1254 (quoting Birdwell v. City of Gadsden, 970 F.2d 802, 805 (11th Cir.1992)). Moreover, the Court construes exemptions from the overtime provisions of the FLSA narrowly against the employer. Birdwell, 970 F.2d at 905.
Plaintiff concedes that Defendant is a retail establishment and that her regular rate of pay was in excess of one and one-half times the minimum hourly rate applicable to her, thus satisfying the first two prongs of the test. (Pl.’s Resp. to Def.’s Mot. for Summ. J. at 5; Pl.’s Mot. for Summ. J. at 5.) The dispute in this case centers around the final requirement.
To rely on the retail or service establishment exemption, Defendant must demonstrate that more than half of Plaintiff’s compensation for a representative period of at least one month represents commissions on goods or services. See29 U.S.C. § 207(i).Section 207(i) provides that:
In determining the proportion of compensation representing commissions, all earnings resulting from the application of a bona fide commission rate shall be deemed commissions on goods and services without regard to whether the computed commissions exceed the draw or guarantee.
29 U.S.C. § 207(i) (emphasis added). Accordingly, in determining whether more than half of Plaintiff’s compensation came from commissions, the Court must also determine whether the commissions paid to Plaintiff were the result of “the application of a bona fide commission rate.”Id. Provided that the employer’s compensation plan is a bona fide plan, any compensation calculated as commissions according to the plan will count as commissions, even if the amount of commissions may not equal or exceed the guarantee or draw in some weeks. 29 C.F.R. § 779.416(b); Erichs v. Venator Group, Inc., 128 F. Supp 2d 1255, 1259 (N.D.Cal.2001). Conversely, even where an employer characterizes the entirety of an employee’s earnings as commissions, the employer may not rely on the retail and service establishment exemption unless the commissions are calculated pursuant to a bona fide commission plan. See generally Erichs, 128 F. Supp 2d at 1260 (explaining that “some payment plans that apparently are commission plans on their face may reveal themselves to be something different upon closer inspection.”). Although Ethan Allen categorized 100% of Plaintiff’s earnings as commissions, Plaintiff contends that Ethan Allen cannot demonstrate that more than half of her compensation came from commissions because her earnings did not result from the application of a bona fide commission rate.
Congress did not define the meaning of “bona fide commission rate.” Herman v. Suwannee Sifty Stores, Inc., 19 F. Supp 2d 1365, 1369 (M.D.Ga.1998) (Sands, J.); Erichs, 128 F. Supp 2d at 1259. Black’s Law Dictionary defines “bona fide” as “made in good faith.” BLACKS’S LAW DICTIONARY 186 (8th ed.2004). Courts have applied this definition to the term bona fide commission rate in Section 207(i).See Herman, 19 F. Supp 2d at 1370 (“Congress … provided that to use this commission-based exception, the commission rate must be set in good faith.”). Therefore, “[t]he inquiry is whether the employer set the commission rate in good faith.” Enrichs, 128 F. Supp 2d at 1259.
The Code of Federal Regulations provides two examples of commission rates that are not bona fide. See29 C.F.R. § 779.416(c). First, a commission rate is not bona fide where “the employee, in fact, always or almost always earns the same fixed amount of compensation for each workweek (as would be the case where the computed commissions seldom or never equal or exceed the amount of the draw or guarantee).”Id.Second, an employer’s commission plan is not bona fide where “the employee receives a regular payment constituting nearly his entire earnings which is expressed in terms of a percentage of the sales which the establishment … can always be expected to make with only a slight addition to his wages based upon a greatly reduced percentage applied to the sales above the expected quota.”Id.
These two examples are not exhaustive. See Erichs, 128 F. Supp 2d at 1260. The Court must examine Defendant’s particular commission rate and determine whether the plan is bona fide or set in good faith. As the Court explained in Herman:
Congress did not state that any commission rate was fine … Instead, it limited the exception to ensure employers would create a commission rate in good faith. Since Congress did not specify a definition of ‘bona fide [,]’ … the DOL did so through section 779.416(c). The DOL’s interpretation is consistent with the purpose of passing an exception to overtime by paying commissions. The whole premise behind earning a commission is that the amount of sales would increase the rate of pay. Thus, employees may elect to work more hours so they can increase their sales, and in turn, their earnings. When a commission plan never affects the rate of pay, the purpose behind using a commission rate also fails.
Herman, 19 F. Supp 2d at 1370;
Erichs, 128 F. Supp 2d at 1260. By requiring that a commission rate is bona fide, “Congress apparently envisions a smell test, one that reaches beyond the formal structure of the commission rate and into its actual effects and the purpose behind it.” Erichs, 128 F. Supp 2d at 1260.
The commission rate in this case passes this “smell test.” Defendant set the commission rate in good faith; the commission rate was not a superficial attempt to categorize Plaintiff’s earnings as commissions in order to avoid having to pay her overtime compensation. Cf. Id. at 1260-61 (finding that the defendant’s commission rate plan was not made in good faith because it was an attempt to replicate the prior, “legally nebulous” plan and would not increase sales); Herman, 19 F. Supp 2d at 1372 (holding that store managers who never received more than the guaranteed rate or received more than the guaranteed rate only once a year were not exempt under the retail and service exemption). Plaintiff’s compensation was entirely commission based. She received a commission ranging from 7% to 9% depending on the volume of her sales. Every two weeks, Plaintiff received a recoverable draw. After the initial four months of employment, if Plaintiff did not have enough sales to cover the draw, she went into deficit. Ethan Allen then deducted any earnings from commissions exceeding the draw from this deficit.
Ethan Allen’s compensation plan provided Plaintiff with a meaningful opportunity to elect to work more hours to increase her sales and earnings. Plaintiff’s monthly commissions exceeded her draw four times. Although Defendant used these funds to reduce Plaintiff’s accumulated deficit from prior months, the fact that Plaintiff could exceed her draw by increasing sales demonstrates her ability to impact her compensation by increasing sales. Unlike the example in the Code of Federal Regulations, Plaintiff did not always or almost always earn the same fixed amount each week; Plaintiff’s earnings fluctuated based on the amount of her sales. Because all of Plaintiff’s earnings resulted from the application of a bona fide commission rate, and are commissions within the meaning of Section 207(i), Defendant met its burden of demonstrating that one of the exemptions to the FLSA’s general overtime requirements applies to Plaintiff. Accordingly, the Court GRANTS Defendant’s motion for Summary Judgment [# 91].”
D.Kan.: Mortgage Broker Not “Retail Establishment”; Financial Specialists Not “Retail” Exempt
Underwood v. NMC Mortg. Corp.
This case was before the Court on Defendant’s Motion for Summary Judgment. Defendant, a mortgage broker, moved for summary judgment asserting that it was a “retail establishment” and that, therefore, Plaintiffs, who were “financial specialists” facilitating their loans, were exempt for the overtime provisions of the FLSA, under the so-called retail exemption. The Court found that Defendant is not a retail establishment, and therefore Plaintiffs are not retail exempt.
“Plaintiffs assert that the facts are analogous to the facts in Saunders v. Ace Mortgage Funding, Inc, in which that court distinguished Gatto and found that the retail or service establishment exemption did not apply. In Saunders, plaintiffs brought a collective action under the FLSA seeking overtime and minimum wage compensation from their employer. The employer, Ace Mortgage (”Ace”), matched mortgage borrowers with lenders for a fee. Ace primarily brokered loans, but it also engaged in a small amount of direct lending called “table funding” where the bank provided the funding for the loan but the loan closed in Ace’s name. Ace also closed a small number of loans in its own name using its warehouse line of credit.
In Saunders, the District of Minnesota examined whether Ace was part of the “financial industry” because the businesses listed in 29 C.F.R. § 779.317 that lacked a retail concept included “credit companies,” “small loan and personal loan companies,” and “finance companies.”
29 C.F.R. § 779.317 specifically cites to Mitchell for the proposition that these type of financial businesses lack a retail concept. The Saunders court found that the facts in Gatto were factually distinguishable because Ace engaged in a small amount of direct lending and declined to use the reasoning in Gatto. It concluded that Ace was part of the financial industry and therefore could not qualify as a retail or service establishment as a matter of law and that the Gatto court ultimately “strained to bring a financial business within the definition of a retail or service establishment on the basis that its activities were limited to brokering, not lending.”
The facts in this case are similar to the facts in both Gatto and Saunders. NMC matched customers with lenders in finding residential loans but did not represent the consumer or the lender. Unlike the defendant in Gatto but similar to the defendant in Saunders, NMC engaged in table funding in which the loan closed in NMC’s name. Although NMC did not use its own line of credit for closing loans like the defendant in Saunders, the Court finds the facts more analogous to the facts in Saunders.
Everything about NMC’s business is related to the financial industry. NMC matched consumers with loans. NMC processed the loan applications. NMC engaged in table-funding so the loan closed in the name of NMC. In contrast to Illinois law where mortgage brokers are defined as “nonfinancial intermediaries,” in Kansas, NMC’s name appeared on the closing loan documents as a “lender” because NMC engaged in table-funding. In its annual report to Kansas, NMC had to report that it was a “lender” from 2004 through 2006 on 422 loans totaling $57,653,391. Finally, NMC underwrote these table-funded loans which indicates more than peripheral involvement in the financial aspects of providing the loan to the consumer. Accordingly, this Court concludes that NMC is within the financial industry and therefore should not be considered a “retail or service establishment.”
Even if this Court were to conclude that NMC was not within the financial field, NMC still lacks the characteristics that would qualify it as a “retail or service establishment.” As the Department of Labor’s regulations make clear, the three characteristics of a retail or service establishment include (1) selling to the general public; (2) serving the everyday needs of the public; and (3) being at the very end of the stream of distribution. Examples of such establishments include grocery stores, furniture stores, and restaurants. NMC is not similar to these retail establishments as it does not appear to the Court that matching individuals with residential mortgage lenders would qualify as selling to the “general public” or serving the “everyday needs” of the public. In any event, NMC is not at the very end of the stream of distribution. In Partida v. American Student Loan Corporation, the District of Arizona addressed this third element when determining whether a company in the business of matching individuals with third-party lenders to consolidate student loans was a retail or service establishment. The court stated that the defendant’s business was “an integral and upstream part of the loan origination business and therefore is on the non-retail end of the establishment spectrum.” As the Partida court noted, “[a] loan referral provides the basis for a subsequent transaction in which an individual obtains what he or she ultimately seeks-a [residential] loan.” The court in Partida concluded that because the business was not at the end of the stream of distribution, the business could not be considered a “retail or service establishment.”
NMC’s business was similar to the business in Partida in that it matched individuals with residential loans. NMC was not providing the end product but was directing the individual to the residential loan. The Tenth Circuit has noted that “[b]usinesses that serve only other commercial establishments are generally not within the ‘retail concept’ of the exemption.” This Court cannot conclude that NMC was at the very end of the stream of distribution. As such, it lacks the characteristics of a retail or service establishment.
Finally, this Court finds 29 C.F.R. § 779.317 instructive. This regulation provides a list of establishments that lack a retail concept and includes freight brokers, insurance brokers, and stock or commodity brokers. Although “mortgage brokers” were not included, the regulation specifically states that it is a “partial list” of businesses. A “mortgage broker” is similar to an “insurance broker” or “stock or commodity broker” because the broker assists the customer in obtaining the mortgage, insurance, or stock. The majority, if not all, of Defendant’s business was done as a “broker.” Because a mortgage broker is similar to the brokers listed in section 779.317, the Court finds that NMC lacks the “retail concept” to be qualified as a “retail or service establishment.” Exemptions are to be narrowly construed under the FLSA, and NMC is not a retail or service establishment under 29 U.S.C. § 207(i) and therefore is not entitled to this exemption.”