Wage and Hour Law Update
Ohio District Court Rules Profit-Based Compensation Scheme Constitutes Bona Fide "Commission" for Purposes of 7(i) Overtime Exemption
As discussed in prior postings, a central issue in determining the application of the FLSA’s “7(i)” exemption is whether the payments to the employee constitute bona fide commissions. In early July, Judge Gregory Frost of the Southern District of Ohio issued another ruling on this issue, finding that the compensation paid to managers and assistant managers at certain Mr. Tire Auto Service Centers constituted bona fide commissions for purposes of the exemption. McAninch v. Monro Muffler Brake, 2011 U.S. Dist. LEXIS 71827 (S.D. Ohio July 5, 2011).
McAninch involved a compensation scheme under which a manager or assistant manager received a percentage of the controllable profit for the store if the store met budgetary targets. When the store deviated in performance from the precise budgetary figure set for the store, the manager’s compensation was recalculated pursuant to a detailed formula which considered monthly fluctuations in store performance, labor costs and controllable expenses. In addition, the Company provided managers with a weekly guaranteed draw, designed to ensure continuity in their compensation, which was reconciled when calculating commissions earned. The court rejected arguments that: (i) the draw negated the Company’s assertion that the commission plan was “bona fide”; (ii) tying the commission rate to store profits as opposed to store sales rendered the payments non-bona fide commissions; and (iii) the managers’ frequent failure to exceed the guaranteed draw affected the analysis. Since the question of whether the payments based on the percentage of controllable profit consisted “bona fide commissions” was the sole prong of the 7(i) exemption (requiring also payment of time and one-half the minimum wage for all hours worked and employment at a “retail or service” establishment) raised by plaintiffs, summary judgment for defendants was appropriate.
Use of commission and other forms of incentive compensation continues to be widespread among employers across all industries. Employers contemplating implementation of a 7(i) compliant commission plan should consult with counsel and closely scrutinize applicable federal and state law.