Employment Law Daily FWW method that included commissions to calculate overtime complied with FLSA
Thursday, February 18, 2016

FWW method that included commissions to calculate overtime complied with FLSA

By Brandi O. Brown, J.D. Affirming a district court judgment in favor of General Nutrition Centers, the First Circuit ruled that a compensation structure used by the employer, which included both a fixed salary under the fluctuating work week method and any commissions earned by an employee in its calculation of the rate for overtime work, complied with the FLSA. Neither the court’s O’Brien’s v. Town of Agawam decision nor a 2011 Department of Labor bulletin dictated a contrary conclusion. The district court’s decision dismissing the complaint was affirmed (Lalli v. General Nutrition Centers, Inc., February 12, 2016, Stahl, N.). Overtime suit. A former GNC store manager challenged the nutrition retailer’s alleged failure to pay him time-and-a-half compensation for hours worked in excess of 40 hours per week. The employee received a guaranteed salary each week. In addition, he received a store manager’s commission, over and above his regular pay, based on a percentage of sales. All commissions were computed and paid with the employee’s base pay on a bi-weekly basis. Inevitably, commissions would vary from week to week. At the heart of the dispute between the employee and employer was a disagreement over whether a company may use the FWW pay model when it factors commissions into the regular weekly rate. Fluctuating workweek calculation. Under the FWW method, GNC would (1) add together both the guaranteed base portion of the employee’s wages for that week and commissions he earned; (2) divide the total by the number of hours he logged; and (3) pay him an additional 50 percent of the resulting per-hour rate for any hour worked in excess of 40 hours. Because the commission figures were included in compiling the regular hourly rate and because commissions were variable, the employee alleged that GNC did not pay him a fixed amount as straight-time pay, so it was improper for the company to use the FWW approach in calculating his overtime. He filed suit, alleging violations of the FLSA and the Massachusetts Minimum Fair Wage Law. GNC filed a motion to dismiss, which the district court granted. The employee appealed. Two methods. Interpretive bulletins issued by the Department of Labor lay out the rules for calculating overtime pay, as well as examples of "compliant pay structures." Two of those structures, the court explained, were at issue in this case. One described a fluctuating work week (FWW) method and another one described what should be done when an employee receives commissions paid on a workweek basis. Under 29 C.F.R. Sec. 778.114, an employee could be employed on a salary basis but have hours that fluctuate from week to week if an understanding with his employer exists "that he will receive such fixed amount as straight time pay for whatever hours he is called upon to work in a workweek, whether few or many." Under this formula, an employee’s fixed salary is divided by the number of hours worked in a particular week to determine the regular rate. Then, in addition to the regular salary, the non-exempt employee is paid 50 percent of that rate for all hours in excess of the applicable maximum. 29 C.F.R. sec. 778.118 describes what an employer should do when an employee receives a "[c]omission paid on a workweek basis." In that scenario, the commission is added to the employee’s other earnings for the week and the total is divided by the hours worked in the week in order to derive the regular hourly rate for that week. The overtime premium then applies the same as with the FWW method, i.e., the employee is paid extra compensation for hours worked in excess of the applicable maximum at 50 percent of the regular hourly rate. Combination is okay. On appeal, the employee argued that GNC had combined the two methods with an impermissible result. The district court disagreed and so, too, did the First Circuit. Payment of a commission based on performance, the appeals court concluded, did not "foreclose the application of section 778.114 with respect to the salary portion of the pay structure at issue." GNC’s compensation arrangement, under which the employee had been paid a fixed salary for whatever hours he had worked, with his earned commissions added to the regular rate calculation and on top of which the employer paid him a 50 percent premium for overtime, "would seem to pass muster." O'Brien’s does not dictate otherwise. However, the employee argued for a different conclusion based on the court’s decision in O’Brien’s. He urged that any other form of compensation factored into the employee’s regular rate made Sec. 778.114, and the FWW method, inapplicable. In O’Brien’s, the court had concluded that inclusion of shift differential pay resulting in varying compensation based on the type of hours worked meant that the salary was not actually "fixed" with respect to the number of hours worked. Unlike O'Brien’s, in this case the salary remained "fixed regardless of the number or type of hours worked." The only variance was in the commission. The court considered it not only "unnecessary" but also "inappropriate" to extend the decision in O’Brien’s to include commissions. DOL’s rejected changes. The court was also not swayed by the Department of Labor’s consideration, and subsequent rejection, of a change to Sec. 778.114 that would have expressly stated that payment of overtime premiums and bonuses would not violate the FWW method. Concluding that the pay scheme used by the employer in this case "epitomizes the compensation arrangements illustrated in" the two regulatory sections "and the mere combination of" the two did not render the FWW method inapplicable, the court affirmed the district court’s judgment.

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