As discussed here and here, the FLSA provides an exemption for employees who 1) are employed by a “retail or service establishment”; 2) earn at least 1.5 the minimum wage for all hours worked; and, 3) earn more than 50% of their compensation in a representative period from commissions. In July 2009, a federal district court in Pennsylvania applied this “7(i)” exemption and found that commission-compensated sales associates of NutriSystem’s weight loss and weight management products were not entitled to overtime under the FLSA. Parker v. NutriSystem, Inc., 2009 U.S. Dist. LEXIS 66597 (E.D. Pa., July 30, 2009). This week, the Court of Appeals for the Third Circuit upheld this decision. Parker v. NutriSystem, Inc., 2010 U.S. App. LEXIS 18691 (3d Cir. Sept. 7, 2010).

On appeal, Plaintiff challenged the district court’s ruling that NutriSystem’s compensation plan established a "bona fide commission rate" and was therefore a "commission" within the meaning of the FLSA and the 7(i) exemption. In upholding the payments in question as commissions, the Third Circuit first noted the paucity of appellate case law defining a commission for purposes of the FLSA. Relying on Judge Posner’s opinion in Yi v. Sterling Collision Centers, 480 F.3d 505 (7th Cir. 2007), the Third Circuit concluded that the NutriSystem compensation plan, wherein “a flat rate fee is not paid unless a sales associate completes a sale . . . [and the fee is] is tied to both the time the sale is made and whether it is based on an incoming or outgoing call”, constituted the payment of bona fide commissions, even though the commission was not calculated as a flat percentage of customer costs. The Court observed that this method of compensation both incentivized the sales associates to make more sales calls, and, importantly, "decoupled [compensation] from actual time worked."

Employers utilizing piece rates, job rates, sales commissions or other forms of incentive pay should be aware of the potential applicability of this exemption. Of course, applicable state law also must be reviewed.