Among the many ambiguities in the FLSA’s often-confusing overtime exemption for commissioned employees of retail or service establishments (known as the “7(i)” exemption), is courts’ varying interpretations of what constitutes a “commission.” This has long been particularly vexing for the banquet industry, where it is customary to charge a mandatory service charge, then distribute that service charge in whole or in part to the banquet service staff. Is such a payment a “gratuity”, or can it be a “commission” within the meaning of 7(i)?
For approximately 20 years, the leading case directly on point was Judge Posner’s decision in Mechmet v. Four Seasons Hotels, Ltd., 825 F.2d 1173 (7th Cir. 1987), in which the court held that such a distributed service charge is a commission for purposes of 7(i). A second federal court, the Southern District of Florida, has now issued a decision consistent with Mechmet. Judge Marcia Cookeheld that such payments are commissions for purposes of 7(i), rejecting the claims of a banquet server who alleged that he received a paltry hourly wage and that his service charge distributions were “tips”, thereby creating violations of the FLSA’s minimum wage and overtime provisions. Nascembeni v. Quayside Place, 2010 U.S. Dist. LEXIS 58707 (S.D. Fla. June 11, 2010). The Judge noted that the service charge payment by the banquet customer was non-negotiable and involuntary. Thus it was a service charge, not a tip, and distributions from that mandatory charge were commissions for purposes of 7(i). Id. at * 6-7.
Hospitality employers utilizing 7(i) should be heartened by the decision, but must remain wary of any practices which might undermine the characterization of supplemental payments for service as mandatory service charges under the FLSA.